Q4 2012 real GDP contracted by -0.1%. Inventory investment nose dived, but was not the lone culprit for economic contraction. Exports plunged and took -0.81 real GDP percentage points along with it. Government spending cliff dove and hacked off -1.33 percentage points from 4th quarter real gross domestic product growth as federal defense spending declined 22.2% from Q3. Private inventory changes subtracted -1.27 percentage points from Q4 real GDP change and as a result of all this the economy went from expansion into contraction. A recession is defined as two consecutive quarters of negative GDP change. We're halfway there.
Consumer spending was really barely breathing in Q4 with a +1.52 percentage point contribution. Consumer spending seems like a bright spot, but that's actually low by percentage points, even though consumer spending did increase from Q3.. Real imports also contracted and thus increased Q4 GDP. Be warned for imports are almost always revised upward in the next GDP revision estimate.
As a reminder, GDP is made up of: where Y=GDP, C=Consumption, I=Investment, G=Government Spending, (X-M)=Net Exports, X=Exports, M=Imports*.
The below table shows the percentage point spread breakdown from Q3 to Q4 GDP major components. GDP percentage point component contributions are calculated individually.
|Comparison of Q3 2012 and Q4 2012 GDP Components
Consumer spending, C in our GDP equation, showed the only real increase from Q3. Durable goods consumer spending contributed a 1.02 percentage points to personal consumption expenditures. Motor vehicles & parts alone was a 0.62 percentage point contribution. Services spending shows a 0.44 percentage point contribution to real GDP, yet housing and utilities subtracted –0.47 percentage points. These values have been adjusted for inflation so one cannot blame falling energy prices or decreased rent. Graphed below is PCE with the quarterly annualized percentage change breakdown of durable goods (red or bright red), nondurable goods (blue) versus services (maroon).
Imports and exports, M & X are greatly impacted by real values and adjustments for prices from overseas and they are usually revised again in the next estimate. Import growth in real dollars has slowed, thus adding to GDP growth, while exports contracted more than imports. The below graph shows real imports vs. exports in billions. The break down of the GDP percentage change to point contributions gives a clear picture on how much the trade deficit stunts U.S. economic growth.
Government spending, G was -1.33 percentage points of Q4's -0.14% GDP contraction. This was all federal spending, and of that Federal –1.25 percentage point GDP contribution, –1.28 of it was national defense. The DoD did prepare for sequestration as the fiscal cliff approached, but there iwas no announcement of any cuts being put into effect. That said, the decline in defense spending is not a one time thing as budget cuts for the department of defense have already been announced.
State and local governments subtracted -0.08 percentage points from Q4 GDP. Local and state governments are still hurting and contracting in their expenditures. Below is the percentage quarterly change of government spending, adjusted for prices, annualized.
Investment, I is made up of fixed investment and changes to private inventories. The change in private inventories alone gave a –1.27 percentage point contribution to Q4 GDP. Below are the change in real private inventories and the next graph is the change in that value from the previous quarter.
The drought is over as farm inventories added 0.11 percentage points to real GDP. .This was businesses contracting their inventories, which is a very bad sign on how much demand they see for their products in the future. Non-farm changes in inventories hacked off –1.37 percentage points from Q4 GDP growth and this reducing inventories on hand for industry can be blamed for Q4's contraction. The question is was industry reacting to Congress and the never ending pushing the economy to the brink by bad policy or is this real demand and a lack thereof?
Fixed investment is residential and nonresidential and is a bright spot in the Q4 GDP report. Overall, fixed investment contributed +1.19 percentage points to GDP. Residential fixed investment was +0.36 percentage point contribution to Q4 GDP. One can see the housing bubble collapse in the below graph and also how there is no meteoric recovery for Q4, in spite of all of the housing data hype. What's happening is there is activity in residential real estate but by volume has not returned to the housing bubble years, which frankly one doesn't want to return to a housing bubble to claim the economy is growing.
Nonresidential fixed investment was even better and gave a +0.83 percentage point contribution to Q4 real GDP. Equipment and software was a +0.86 GDP percentage point contribution while structures subtracted -0.03 percentage points from GDP.
Motor Vehicles as a whole was 0.04 percentage points of Q4 real GDP. Computer final sales, contributed to GDP by 0.15 percentage points. These categories are different from personal consumption, or C sub-components, such as auto & parts. These are overall separate indices to show how much they added to GDP overall. Motor vehicles, computers are bought as investment, as fleets, in bulk, by the government, as well as part of consumer spending, government spending and so on.
Overall services slammed GDP with a -0.78 percentage point contribution while goods, overall added +0.28 percentage points. Structures, overall, which is building activity, both residential and commercial and economic activity it generates, contributed +0.36 percentage points to Q4 real GDP.
The price index for gross domestic purchases, was 1.3% for Q4 in comparison to 1.4% for Q3. This means inflation was on par with last quarter. Core price index, or prices excluding food and energy products, was 1.1% .
Nominal GDP: In current dollars, not adjusted for prices, Q4 GDP, or the U.S. output, is $15.829 trillion, an 0.5% increase from Q3's $15.811 trillion . Applying the price indexes, or chained, real 2005 dollars, Q4 2012 GDP was $13.648 trillion. All figures are annualized.
Gross domestic purchases are what U.S. consumers bought no matter whether it was made in Ohio or China. It's defined as GDP plus imports and minus exports or using our above equation: where P = Real gross domestic purchases. Real gross domestic purchases only increased 0.1% in Q4 in comparison to a 2.6% increase in Q3. Exports are subtracted off because they are outta here, you can't buy 'em, but imports, as well a know all too well, are available for purchase at your local Walmart. When gross domestic purchases exceed GDP, that's actually bad news, it means America is buying imports instead of goods made domestically.
Real final sales of domestic product is GDP - inventories change. This gives a better feel for real demand in the economy. This is because while private inventories represent economic activity, the stuff is sitting on the shelf, it's not demanded or sold. Real final sales increased 1.1% for Q4, which reflects weak demand. Q3 real final sales increased 2.4%.
Below are the percentage changes of Q4 2012 GDP components, from Q3. There is a difference between percentage change and percentage point change. Point change adds up to the total GDP percentage change and is reported above. The below is the individual quarterly percentage change, against themselves, of each component which makes up overall GDP. Additionally these changes are seasonally adjusted and reported by the BEA in annualized format.
Q4 2012 Component Percentage Change
|Percentage Change from Q3
The BEA's comparisons in percentage change breakdown of 4th quarter GDP components are below. Changes to private inventories is a component of I.
C: Real personal consumption expenditures increased 2.2 percent in the fourth quarter, compared with an increase of 1.6 percent in the third. Durable goods increased 13.9 percent, compared with an increase of 8.9 percent. Nondurable goods increased 0.4 percent, compared with an increase of 1.2 percent. Services increased 0.9 percent, compared with an increase of 0.6 percent.
I: Real nonresidential fixed investment increased 8.4 percent in the fourth quarter, in contrast to a decrease of 1.8 percent in the third. Nonresidential structures decreased 1.1 percent; it was unchanged in the third quarter. Equipment and software increased 12.4 percent in the fourth quarter, in contrast to a decrease of 2.6 percent in the third. Real residential fixed investment increased 15.3 percent, compared with an increase of 13.5 percent.
X & M: Real exports of goods and services decreased 5.7 percent in the fourth quarter, in contrast to an increase of 1.9 percent in the third. Real imports of goods and services decreased 3.2 percent, compared with a decrease of 0.6 percent.
G: Real federal government consumption expenditures and gross investment decreased 15.0 percent in the fourth quarter, in contrast to an increase of 9.5 percent in the third. National defense decreased 22.2 percent, in contrast to an increase of 12.9 percent. Nondefense increased 1.4 percent, compared with an increase of 3.0 percent. Real state and local government consumption expenditures and gross investment decreased 0.7 percent, in contrast to an increase of 0.3 percent.