The fourth quarter 2012 Gross Domestic Product (GDP) number came in earlier this week and it was surprisingly negative, -0.1 percent to be exact. Jim Cramer, the colorful CNBC personality, immediately called it a “one-off.” In other words it is just a statistical anomaly to be ignored, and the market has pretty much acted accordingly. But is he right? Should we just ignore negative growth? After all, if we have negative growth again this quarter, that would mean we are officially in a recession…right?
Well, Cramer is only half right (which, for him, is actually pretty good). What the fourth quarter really was is a return to the mean. The actual statistical anomaly was the third quarter 2012 GDP, which on the surface appeared to be a robust 3.1 percent growth, but was actually caused by an explosion in government spending. Likewise the negative growth in the fourth quarter was caused by a sudden stop in that spending. What we are really witnessing is the effect of the fiscal cliff and the spending element of that deal, which Washington has named “the sequester.”
As we have written previously, if a good bureaucrat knows her budget will be slashed next year she will do all in her power to spend every dime she has this year. It is no coincidence that the government’s fiscal year ends on September 30. Faced with uncertainty at best and large cuts to one’s budget at worst, the bureaucrat is going to spend, and so they did. However, all this does is move consumption that would have occurred under the normal course of business in the fourth calendar quarter into the third calendar quarter. So in actuality a large portion of the government’s fourth-quarter spending was simply accelerated into the third quarter, making third quarter GDP look great and the fourth quarter look recessionary. I believe the truth is found by averaging the two. The 3.1 percent growth and the 0.1 percent contraction equal 1.5 percent GDP growth per quarter for the second half of 2013. This is in line with the 1.3 percent growth in the second quarter and with our new normal of slow growth.
The good news is that there are signs that some areas of the economy are picking up, especially in housing. We expect about 2 percent growth in 2013, which isn’t great but it is better than the last three quarters of 2012, and any improvement should be welcomed. Many of the crises that haunted us last year seem to have passed, and with bond yields still below 2 percent, there really is nowhere for investors to go but stocks. This should help the market.
Of course with growth as slow as it is likely to be, it will not take much to push us into recession. We stand ready to act, but for now I think the full second half of last year was one statistical anomaly.
Chuck Osborne, CFA
Managing Director
