We’ve mentioned a few times today that GDP went negative primarily because of the big drop in defence spending.
But we didn’t realise just how historic the drop was.
JPMorgan economist Michael Feroli put it in context. The defence spending drop happened at the fastest pace in 40 years. As you can see in the chart below, the last time we had a faster drop was in 1972.
Below is Feroli’s take:
Real GDP contracted at a 0.1% annual rate last quarter — a disconcerting headline number which masked better underlying performance of the economy. The weakness in Q4 output was primarily driven by two factors: a 22% annualized drop in defence spending — the most in 40 years — and a pullback in the pace of inventory accumulation, in part due to lingering effects of the drought. Absent these two factors the rest of the economy expanded at a relatively decent 2.5% pace last quarter.
Foreign trade subtracted another 0.3%-point from growth in Q4.
The two main components of private domestic demand, consumption and business fixed investment, actually accelerated last quarter, as consumers increased real outlays at a 2.2% rate and capital spending rebounded to an 8.4% growth pace.
Odd as it may sound, today’s number actually leaves the economy relatively well-positioned heading into the first quarter; the slowing in the pace of inventory accumulation (real inventories were only built up at a $20.0 billion rate in Q4) means that businesses will not have to pull back on production as much in Q1 if consumer spending does downshift in response to the recent tax increases.
We continue to look for growth this quarter of around 1.0%, with modest upside risk due to the lean inventory situation and the decent momentum in private final demand.
Here’s the chart:
Photo: Bloomberg, Business Insider