Surprise Q4 GDP Decline’s Not Quite As Bad as It Sounds

Everyone was expecting a weak Q4 GDP number due to companies drawing down inventories and reduced exports, but the number came in today at a surprising negative 0.1 percent. We produced, in other words, fewer goods and services in the fourth quarter of last year than we did in the third.

And yet when you peer into the internals, the situation looks surprisingly benign. For example, “real disposable personal income increased 6.8 percent,” which is really solid. Consequently, both personal consumption and personal savings went up. Nonresidential fixed investment went up 8.4 percent. Residential investment went up 15.3 percent. So people are consuming more and saving more and businesses are investing more and we’re adding to the housing stock. That’s all good stuff.


On the downside we had, as expected, a decrease in net exports and a decrease in inventories. We also had a small decline in state and local government consumption as state/local austerity continues to bite. But what really slammed the economy was that national defense expenditures fell 22.2 percent. That’s a lot! And the pacing of military spending is weird. Simply put, nobody cut the Pentagon’s budget by 22.2 percent. But the timing of spending and appropriations doesn’t line up perfectly, so there are strange swings in the military element of GDP.

At any rate, revisions matter here. The average quarterly GDP revision amounts to 1.3 percentage points, so we shouldn’t make too big a deal out of the initial number.