The Economy Went Flat in Q4, but Poised for Future Recovery

It's now official, but most manufacturers and a lot of mold shops pretty much knew it all along--the U.S. economy did not grow at the end of last year. In fact, the latest data released by the Bureau of Economic Analysis indicate that real GDP in the US contracted by 0.1% in the fourth quarter of 2012. For the year as a whole, real GDP expanded by 2.2% which is about the same annual rate growth as the previous two years.

A closer look at the data shows that the economy actually performed better than the headline number suggests. Growth in both total consumer spending and business investment actually accelerated from the third quarter. These gains were dragged down by sharp declines in total inventory accumulation and government spending. There was also a decline in net exports. The slowdown in exports, due mainly to the recession in Europe, is somewhat troubling, and this is a trend we should try to reverse in the future. But I am not too concerned about a drawdown in inventories, and I am downright encouraged by a decline in government spending.

So the net result of all of these trends may be sluggish growth in the near term, but in the long term these trends will result in a more healthy recovery. Our latest forecast calls for sub-par GDP growth in the first half of 2013, but the recovery will accelerate noticeably in the second half of this year. We expect the annual growth in real GDP to be at least 2.5% this year, and at least 3.5% in 2014.

The small decline in overall economic activity at the end of last year was primarily due to one-time events that will not be repeated: Hurricane Sandy and the fiscal cliff debacle. And the best leading indicators of future GDP growth are at the present time. The stock market is very close to its all-time high. This is a strong signal that investors are presently quite bullish about this nation's future prospects. Another reliable indicator is the trend in residential housing starts. Prior to 2012 the housing sector was a drag on the economy, but things perked up in the second half of last year and now this sector is in full recovery mode.

For now, patience is still the order of the day. But by the end of this year it is quite likely that the economy will finally be hitting on all cylinders.