The Truth About The U.S. Economy

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On Wednesdaythe government announced that the gross domestic product (GDP), the total valueof goods produced and services provided, fellat an annual rate of 0.1 percent during the fourth quarter of 2012. That officially marks the worst performance of the economy since the endof the recession in 2009.  Theannouncement took analysts and economists by surprise since those polled byReuters were reportedly expecting the economy to rise by 1.1 percent.
The Associated Press reported that the driving factorsbehind the contraction were, “the biggest cut in defense spending in 40years, fewer exports and sluggish growth in company stockpiles.”  They pointed out that this could cause newfears with regards to the recent tax increases and planned government spendingcuts but quickly postulated that, “the weakness may be because of one-timefactors. Government spending cuts and slower inventory growth subtracted atotal of 2.6 percentage points from growth.” However, the fourthquarter saw a 2.2% increase in consumer spending and a large number of companiesexperiencing earnings growth for the quarter, driving their stock pricesup.  These factors lead many to believethat this is an isolated incident
But let’slook at this a little closer.  First ofall, fourth quarter includes the Christmas shopping season during whichconsumers traditionally spend more than normal. The Social Security tax cut expired at the end of 2012, raising payroll taxesby 2%, or roughly $1,000 on households earning $50,000 a year.  That is sure to depress consumerspending.  Additionally, deepergovernment spending cuts are set to take effect in March unless Congress takesaction, which is certain to have a negative effect on the economy as well.
Next is theissue of lower corporate inventories.  Caterpillar,Inc. reported a $2 billionreduction in inventory aswell as a reductionin profits during the fourthquarter while Apple reported a 50%reduction in partspurchases.  There are two reasons why companieswill reduce their inventories.  The firstis if they found themselves with too much on hand the previous quarter.  The second is if they expect lower sales inthe future.  Quite often an inventorysurplus in the previous quarter can be attributed to slower than expectedsales.  This can lead to lower salesforecasts and a consequential reduction in inventory stocks.  These factors ultimately will impactcorporate earnings for the next quarter.
Finally,although there were a large number of companies reporting earnings growth forthe quarter, it was below trend.  As ColinLokey points out, “accordingto Goldman Sachs, the percentage of firms reporting positive earnings surprisesat this point into earnings season has run at around 47% over the last 40quarters, at around 40% over the last four quarters, at around 36% during lastyear's third quarter earnings season, and at just 34% during the currentearnings season”.
While it’s impossible to foretell the future with anycertainty, at this point it time it looks like this could possibly be the startof another recession.  Only time willtell.