On Wednesday
the government announced that the gross domestic product (GDP), the total value
of goods produced and services provided, fell
at an annual rate of 0.1 percent during the fourth quarter of 2012.
That officially marks the worst performance of the economy since the end
of the recession in 2009. The
announcement took analysts and economists by surprise since those polled by
Reuters were reportedly expecting the economy to rise by 1.1 percent.
The Associated Press reported that the driving factors
behind the contraction were, “the biggest cut in defense spending in 40
years, fewer exports and sluggish growth in company stockpiles.” They pointed out that this could cause new
fears with regards to the recent tax increases and planned government spending
cuts but quickly postulated that, “the weakness may be because of one-time
factors. Government spending cuts and slower inventory growth subtracted a
total of 2.6 percentage points from growth.”
However, the fourth
quarter saw a 2.2% increase in consumer spending and a large number of companies
experiencing earnings growth for the quarter, driving their stock prices
up. These factors lead many to believe
that this is an isolated incident
But let’s
look at this a little closer. First of
all, fourth quarter includes the Christmas shopping season during which
consumers traditionally spend more than normal.
The Social Security tax cut expired at the end of 2012, raising payroll taxes
by 2%, or roughly $1,000 on households earning $50,000 a year. That is sure to depress consumer
spending. Additionally, deeper
government spending cuts are set to take effect in March unless Congress takes
action, which is certain to have a negative effect on the economy as well.
Next is the
issue of lower corporate inventories. Caterpillar,
Inc. reported a $2 billion
reduction in inventory as
well as a reduction
in profits during the fourth
quarter while Apple reported a 50%
reduction in parts
purchases. There are two reasons why companies
will reduce their inventories. The first
is if they found themselves with too much on hand the previous quarter. The second is if they expect lower sales in
the future. Quite often an inventory
surplus in the previous quarter can be attributed to slower than expected
sales. This can lead to lower sales
forecasts and a consequential reduction in inventory stocks. These factors ultimately will impact
corporate earnings for the next quarter.
Finally,
although there were a large number of companies reporting earnings growth for
the quarter, it was below trend. As Colin
Lokey points out, “according
to Goldman Sachs, the percentage of firms reporting positive earnings surprises
at this point into earnings season has run at around 47% over the last 40
quarters, at around 40% over the last four quarters, at around 36% during last
year's third quarter earnings season, and at just 34% during the current
earnings season”.
While it’s impossible to foretell the future with any
certainty, at this point it time it looks like this could possibly be the start
of another recession. Only time will
tell.
Associated Press forgot to report that in the long term military spending rate is not sustainable.
ReplyDeleteI would rather pointed out that USD dollar is valued historically higher towards all major currencies - Japanese Yen, British Pound and Russian Rubble. The first two dropped in their value from 8 to 20% in the last a few months. While British Pound lost 25% of its value since 2007.
I think government is loosing its opportunity - they need to announce military cuts, as well as withdrawal from Iraq & Afghanistan pointing out that it will lead to contraction in economy but brighter future tomorrow.
It is hardly possible to reduce debt and keep economy expanding at the rates we want it to.