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 Federal Government’s first projection of GDP for the 4th quarter of 2012 was released, showing that the economy contracted slightly between October and December. This suggests that the economy grew by a meager 1.5 percent in 2012, although the final number is subject to some revision. While GDP is supposed to be a measure of production, it is actually measured by the government using consumption expenditures (which are supposed to balance each other). In the 4th quarter overall consumption fell by 0.1 percent with most of this coming from reduced inventories, less spending on defense and a greater share of imports.
Businesses and industries should be concerned about a reduction in GDP because the overall level of income available to customers tracks this number; however, the small 4th quarter decline is of less concern because it comes mainly from two sources, neither of which is closely linked to future production or consumption. In fact, falling inventories could be a sign of good growth in the 1st quarter, as manufacturers move to fill orders from production rather than from warehouses. 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.