1/30/13 10:48 AM – US Economy Shrinks in 4Q

Surprise? After a stronger than expected growth of 3.1% in the 3rd quarter of 2012, the first estimate of 4Q growth showed a DROP of 0.1%. Analysts were only looking for growth of 1% but not many expected a drop.

Contributers were a big drop in defense spending and government spending. I’m guessing the latter was on the state and local level because federal spending seems to continue unabated.

On the positive side, business spending for big projects (capital spending) rose 8.1%. That’s a good number. Real estate and construction also continue to pick up. Consumers spent 2.2% more in the 4th quarter than the year before.

I think the current quarter is also growing more slowly than people think. The going back to the normal payroll tax after a 2% holiday in 2012 took a bite out of everyone’s paycheck. And, taxes are going up on the upper 2%. You might think that would have not much effect but they likely foresee their taxes going up even more and might pull back. They may only be 2% of earners but they tend to spend in outsize proportion to their numbers.

Also, defense spending may be in for another big cut this quarter as the sequester kicks in unless Congress stops it.

Europe is also sluggish, according to recent reports. Asia is the bright spot in terms of growth lately. China should continue to spend heavily as they change leadership. They always want the new leadership to look and one tried and true method is to ramp up spending during regime changes.

I think all this argues for continuing to shift money to emerging markets. It also is good news for bond markets, who like slow growth. It is bad news for cyclical stocks.

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