By Peter G. Hall
Uh-oh. Readers of this column know how much stock EDC Economics puts in the strength of the U.S. economy. Last week’s preliminary glimpse at fourth quarter U.S. GDP was a pretty icy shower, even for the pessimists. The consensus view was for a meagre 1.1 per cent increase for the quarter. Instead, it rang in at -0.1 per cent. Is this a major jolt to the 2013 forecast for the engine of the global economy, or is there a good explanation for the sudden about-face? (If so, it had better be a good one).
Things had been looking good. Third-quarter GDP growth was impressive, at 3.1 per cent. Key indicators were looking good in the run-up to year-end. Forecasts were being revised upward, not the reverse. The trouble with a late-breaking U-turn in growth is that the impact is almost all on the next year. The fourth quarter of any year is always the one with the least contribution to that year’s growth; odd as it may sound, three-quarters of the impact actually carries forward to the following year’s GDP result – unless, of course, there is a double-reverse in the following quarter that offsets this one. Is that likely?
The answer lies in the causes of fourth-quarter weakness. International trade was soft in the final three months of the year. Storm activity on the East Coast appeared to inhibit both imports and exports, although ongoing weakness in the OECD economies and the summer slowdown in China, India and Brazil are likely additional causes of the large dip in exports. A fast rebound is unlikely, given that, on balance, U.S. is still the growth leader – that is, expect imports to outpace exports.
Government spending was a huge drag on the fourth-quarter numbers. Adjusted for inflation, government consumption and investment together fell 6.6 per cent, enough to slice 1.3 percentage points from quarterly GDP growth. While these figures can be fickle, a fast turnaround is quite unlikely, given the expiration of special spending programs and the ongoing squabble in Washington over fiscal prudence. Austerity measures are expected to bleed 1.5-2 percentage points from GDP in 2013.
Not to be outdone, a sharp drop in inventories took as much away from fourth-quarter growth as the government sector. However, there’s a big difference – with storms temporarily arresting movements of goods and services, it’s no wonder that purchases depleted inventories, and it’s just as likely that those inventories are being replenished as we speak. A rebound could provide a welcome boost to first-quarter GDP – but only if underlying demand is strong enough to prompt it. Is there a clear case?
That’s where the fourth-quarter data get exciting. Powered by a 13.9 per cent surge in durable goods, consumption turned in a very decent showing. This spending was no doubt related to an equally impressive 15.3 per cent gain in residential investment – yet another installment in long-awaited revival in the U.S. housing market. Quarterly data also show more than a glimmer of hope that U.S. corporations are beginning to part with a slice of their massive cash stash. Private investment in equipment ballooned by 12.5 per cent, following three semesters of so-so growth. These three engines on their own contributed 2.6 percentage points to quarterly GDP growth in the final three months of last year. Small wonder that an average of 210,000 private sector jobs were created in each of the past four months. Impressive!
The bottom line? As shocking as America’s fourth quarter figures are, one key message rings through: underlying growth is where it’s at. Know that the government and trade sectors will weigh down growth, making things look humdrum. But the rest of the U.S. economy is heating up, and that’s where Canadian exporters do the bulk of our business. Prepare to harness this growth in 2013!
This commentary is reprinted with permission from EDC. It is presented for informational purposes only. It is not intended to be a comprehensive or detailed statement on any subject and no representations or warranties, express or implied, are made as to its accuracy, timeliness or completeness. Neither EDC nor the author is liable whatsoever for any loss or damage caused by, or resulting from, any use of or any inaccuracies, errors or omissions in the information provided.