Surprise GDP Result Provokes Little Reaction from Wall Street

The Commerce Department’s preliminary estimate of GDP for the 4th quarter showed a -0.1% growth rate. The decline was unexpected, as most economists predicted a gain of around 1%. There were two primary drivers of the negative growth, neither is particularly troublesome: a large reduction in government defense spending and a reduction of inventory growth.

Government spending fell at a 6.6% annual rate in the 4th quarter, led by a 22.2% reduction in defense spending. Many see this as a result of accelerated 3rd quarter defense spending in advance of possible budget cuts. In all, reduced government spending subtracted 1.3% from GDP. Other deficit reduction measures may reduce government spending in the future, but this sharp of a decline is not expected anytime soon.

Inventories grew at a $20 billion annual rate, but this is down from a $60 billion rate from the previous quarter. This slowdown also subtracted 1.3% from GDP. Household consumption, residential construction, and corporate spending were all positive contributors, leading some economists to believe that the slowing inventory growth was led by a smaller crop harvest and supply chain disruptions from Superstorm Sandy. There is no reason to believe that companies will continue to slow inventory stockpiling in the current quarter.

In the end, the headline number was a bit surprising but it is being shrugged off by Wall Street as temporary and incongruous with recent economic results such as jobs and housing data.

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