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I was raised Jewish, so I never had the experience of being told that Santa Claus wasn’t real. But whatever that’s like, I imagine it’s how believers in The Confidence Fairy are feeling today, after the release of the government’s GDP report.What’s the Confidence Fairy? We’ll get to that in a second. But first, it’s worth pointing out that it was a very strange GDP report. For the first time since the end of the recession, we got a negative, contractionary print. GDP shrank 0.1%, a number that was far below expectations.
But our conclusion, as well as that of many Wall Street analysts, was that the number was far stronger than appeared. The negative aspects of the report came from a decline in military spending, and a slower pace of inventory accumulation by businesses.
Conversely, end consumption, investment in equipment/software, and residential investment, actually grew quite nicely.
And that’s where The Confidence Fairy comes in. Believers in The Confidence Fairy believe that if only the government would just get out of the way, and stop having needless political fights, then business would spend more. If the confidence fairy could just provide some assurance on deficits and taxes then — bam! — business investment would surge, and people would start hiring.
If there were ever going to be a quarter where uncertainty over taxes and spending would slam economic activity, Q4 2012 would have been it. There was the election in early November, and then of course there was the fiscal cliff fight, which literally went all the way to the deadline.
In a post at The Guardian, Heidi Moore argues that we did see the effect of the Fiscal Cliff on business confidence.
So, what happened?
Washington’s idiotic battle over the fiscal cliff is what. The automatic tax hikes and government spending cuts set to go into motion would have hurt a wide swath of American people. CEOs were particularly loud about the need for Washington to come to some kind of decision. Still, despite the pleading and the obvious economic harm implied in letting the fight go to the eleventh hour and beyond, lawmakers refused to get their acts together enough to address the fiscal cliff.
Except the numbers don’t bear this out.
Dean Baker observes one of the biggest bright spots in the report:
Investment rebounded from a weak third quarter in which non-residential investment actually shrank. This quarter it added 0.83 percentage points to growth, with investment in equipment and software growing at a 12.4 per cent rate. Housing continued to be a big positive in the quarter, adding 0.36 percentage points to growth.
A 12.4% annualized rate of equipment/software spending!
One item worth noting is the GDP report provides zero evidence that “fiscal cliff” concerns had any impact on growth in the quarter. Consumer durable purchases and investment in equipment and software were the two strongest components of GDP. If worries over the fiscal cliff were supposed to cause people to put off purchases, consumers and businesses apparently did not get the memo.
This isn’t just Baker’s opinion.
WSJ has a piece up: “Fiscal Cliff Didn’t Hold Back Business Spending.”
We actually knew that the Fiscal Cliff wasn’t a problem for business spending and investment before today.
Just earlier this week, Neil Irwin had a great post up at WaPo, pointing out that we got a very strong durable goods report (business spending on big, heavy items) in December, which was right in the teeth of the Fiscal Cliff debate.
We also pointed this out in November, that uncertainty and the cliff were having no effect on Durable Goods spending.
Other regional Fed numbers and ISM data from late 2012 showed the same thing. Cliff jitters never mounted.
Q4 GDP decline was about 2.5 things.
1: A sharp decline in military spending.
2: The reversal of previous inventory build.
2.5: Hurricane Sandy probably affected some regions for part of the quarter.
The cliff and confidence were not part of the story.
SEE ALSO: Michelle Meyer: Fade the GDP headline >