National Economic Update
Factors Restraining U.S. Economy Should Lessen
February 4, 2013 · Update in PDF
Recently released indicators suggest that overall U.S. economic activity decelerated in fourth quarter 2012, as moderate growth in consumption and housing continued amid notable declines in inventory and government spending. Real output contracted at a nearly flat 0.1 percent annual rate in the fourth quarter. Growth was hindered by expected pullbacks in government spending and inventories investment. The current upward trend in durable goods orders growth reflected a turning point for previously declining investment levels. The most strength can be found in the fact that retail sales growth has consistently posted a solid growth rate, and residential construction rose strongly amid other indications of a housing recovery. Job growth has decelerated to a moderate pace. Looking ahead, output in first quarter 2013 should bounce back as a number of restraining factors are removed or dissipate.
Contraction Closes Out 2012
The U.S. economy slightly contracted at a pace of 0.1 percent in fourth quarter 2012. A temporary boost from government spending in the third quarter turned negative in the fourth quarter. The U.S. economy entered 2013 with less upward momentum than was generally recognized. Third-quarter real gross domestic product (GDP) growth was hardly revised, with overall output growth reported at 3.1 percent in the final release. Despite improvement in personal consumption expenditures (PCE), the fourth-quarter growth rate revealed a decline in output for two reasons. The contribution of inventory investment to real GDP growth was 2.0 percent less than its contribution in the third quarter (0.7 percent versus –1.3 percent), and the contribution of government spending dropped by a similar amount (Chart 1). Surprisingly, while the contribution of equipment and software investment was –0.2 percent in the third quarter, the contribution of this component of business fixed investment grew to 0.9 percent in the fourth quarter. The negative impulses of inventories and government spending should lessen in the first half of 2013, leading to higher growth in the first quarter.
Business Investment Reverses Decline
The smoothed growth rate of durable goods orders excluding transportation tends to capture most swings in business equipment and software investment (Chart 2). The weakness of orders since June 2012 led the contribution to GDP growth of this key gauge of investment to decline throughout much of 2012; however, the recent trend toward positive growth in orders led the uptick in investment growth in fourth quarter 2012. The uptick of equipment and software investment in the preliminary GDP release was greater than expected given such a slight increase in orders. In addition to the surprising positive impact of business fixed investment on GDP growth in the fourth quarter, PCE, which accounts for 71 percent of GDP, exhibited moderate growth.
Spending Maintains Solid Growth Through the Fourth Quarter
Year-over-year readings of retail sales (Chart 3) indicate that nominal total retail sales and personal consumption expenditures have been growing at a consistent pace, with a slight pickup in December to 4.4 and 3.6 percent, respectively. The retail control category (retail sales excluding autos, gasoline and building materials) has also posted solid growth, though slightly lower than that of total retail sales. Personal spending has remained stable since spring 2012 after posting stronger growth in 2011. With inflation remaining between 1 and 2 percent, the implied real rates of personal spending expansion appear good enough to absorb the shock from the expiration of tax cuts in early 2013. Another good sign for personal spending is that strength in the housing market may create positive wealth effects for consumption.
Residential Construction Rebound Continues
While the upturn in housing activity is coming off historically low levels (Chart 4), it is still notable and likely reflects the beginning of a true recovery from the housing contraction. Gains in housing are likely to continue over the next few years because construction is still well below levels needed to replace demolished homes and meet the needs of a growing population. Taking single-family permits as a leading indicator of real single-family construction, the housing market appears likely to continue its upward momentum. In addition, some regulatory and legal impediments to mortgage lending will probably be lessened and boost housing in coming months. Along with low mortgage rates and moderate job growth, the medium-term prospects are positive for housing construction and the housing market as a whole.
Employment Growth Moderates in 2013
Employment growth appears to have slowed from the stronger pace of third quarter 2012 to a pace consistent with moderate improvement in the labor market. The payroll employment survey posted a gain of 166,000 private jobs in January while the household employment survey saw an increase of only 17,000 jobs. One reason to view the monthly readings from the household survey with extra care is that, in contrast to the payroll survey, the overall increase in household employment is affected by shifts in self-employment, private employment not at business establishments, and multiple job holdings. Accounting for these differences with available data yields an adjusted household job growth reading on a near payroll-equivalent basis (though certainly still noisier). Both the payroll series and the adjusted household series have exhibited solid, but not strong, growth, with the three-month moving average of private payroll growth at 208,000 jobs (Chart 5). With the resolution of some tax uncertainty, employment growth could increase in 2013 as employers have a better idea of what fiscal policy will be.
The fourth-quarter pace of GDP growth fell well short of the third-quarter pace owing to a slowing of inventory investment and government spending. Against this weakness is the strength of an emerging housing recovery and solid personal spending growth, as well as strengthening business fixed investment. Recent moderate employment growth could improve following diminishing fiscal policy uncertainty. First-quarter GDP growth will likely rise as inventories and government spending exert less drag, but the growth should remain modest because personal spending growth will likely slow a bit early this year. The upshot is that if the euro crisis continues to ebb and remaining fiscal policy issues are reasonably handled, the U.S. economy appears poised to pick up from the modest pace of 2012 and gain momentum moving into the second half of 2013.
About the Author
Cooke is an economic programmer/analyst in the Research Department of the Federal Reserve Bank of Dallas.