Gross Domestic Product is a measure of the nation’s economic activity. The statistic measures the sum of the nation’s production for both the private and public sectors. A nation with an increasing GDP in real terms is considered to be growing, while one with a declining GDP in real terms is in recession. (NOTE: By real economists mean adjusted for inflation and population).
The BEA put out its third revision of 4th quarter 2012 and reports that the overall economy grew by 0.4 percent in the quarter. While this is at least positive, it is significantly lower than the third quarter estimate of 3.1 percent, and reflects overall economic growth for the year of just 2.2 percent in 2012 (a slight increase over the 1.8 percent in 2011).
Businesses and industries should be concerned about slow GDP growth because the overall level of income available to customers tracks this number; however, the small 4th quarter increase may be of less concern because it comes mainly from two sources, neither of which is closely linked to future production or consumption. The first is net exports, which fell due to a decrease in both exports and imports; however, a large portion of imports are petroleum products and these tend to be more stable than other merchandise imports – as such exports and imports both fell but exports fell more rapidly. In addition, even though some industries rely heavily on defense spending, war is destructive to the economy overall and seeing a continuing large reduction in federal defense spending is likely good for the economy. It is however, likely that much of the decline in federal spending was due to the potential of sequester, something which is now unlikely to continue into the first quarter, suggesting that rather than the normally weak 1st quarter, we should see something closer to 2% annualized growth in 2013-1.
We believe that continued slow growth in the economy will keep the pressure on the Federal Reserve to keep interest rates at ridiculously low levels forcing continued bond purchases on the open market. This should also keep unemployment rates from changing dramatically during 2013 which will keep downward pressure on labor costs. Pressure will continue on the dollar making imports more expensive and helping to stimulate exports to some extent.