Drop in GDP confirms bad economic news isn’t going away anytime soon

Raymond Keating
Raymond Keating

The latest news on the United States economy managed to get even worse than what we’ve experienced recently.

Real growth in gross domestic product the fourth quarter of 2012 was expected to be pretty poor. But a negative 0.1 percent was even worse than those poor expectations. This was the first quarter of negative growth since the second quarter of 2009.

Key negatives were big declines in trade and business inventories.

Exports fell by 5.7 percent. For good measure, imports declined for the second straight quarter. It’s important to remember imports largely reflect the state of the domestic economy. When domestic growth is strong, imports rise. When the domestic economy falters, imports decline.

Business inventories shaved 1.27 percentage points off the growth rate. The decline reflected uncertainty and concern among businesses, no doubt.

It also must be noted that government consumption expenditures and gross investment declined by 6.6 percent in the fourth quarter. That’s not necessarily a bad thing, although almost all of the decline came in the area of defense. But even if we factor out government, private real GDP only expanded by 1.2 percent.

A couple of potential positives could be found in the numbers. Real fixed nonresidential investment grew by 8.4 percent after declining in the third quarter. In addition, residential investment continued to struggle back from depression levels by rising by 15.3 percent in the fourth quarter.

For all of 2012, real GDP grew by 2.2 percent, about half of where growth should be in a recovery.

Unfortunately, looming policy costs and uncertainties promise to serve as key obstacles to strong growth in the U.S. It’s clear, for example, that uncertainty about the so-called “fiscal cliff” of impending tax increases and automatic federal spending cuts factored into the grim fourth-quarter GDP results.

As for 2013, the “fiscal cliff” and ObamaCare tax increases have become negative realities while questions persist regarding regulations on ObamaCare; Dodd-Frank; the EPA and energy; labor; and the tax consequences of mounting government spending, deficits and debt. Factor in the drag that unprecedented loose monetary policy by the Federal Reserve. That policy combination will only serve as a continued negative for risk taking and economic growth.

Since late 2007, the U.S. economy has performed poorly. Little reason exists to think growth is going to shift onto a robust track anytime soon. The growth we’ve experienced and will experience in coming months is an incredible testament to the resiliency of American entrepreneurs and business owners who face an aggressively hostile policy climate in which to take risks and do business.