The Q4 2012 Economic Contraction: Is It As Bad As It Looks?


The Q4 2012 Economic Contraction: Is It As Bad As It Looks?

By Keith Hall |
Jan 30, 2013

Former BLS Commissioner Keith Hall Reacts to Q4 2012 Economic Contraction

News from the Bureau of Economic Analysis that the economy shrank 0.1 percent in the fourth quarter of 2012 caught many by surprise, given the 3.1 percent GDP increase in the prior quarter. However, Mercatus Center senior research fellow Keith Hall, a former Bureau of Labor Statistics commissioner,  said that the third quarter increase resulted from a surge in government spending that masked weaker private sector growth.

“The third quarter statistics were misleading; the economy was weaker than it looked. Conversely, the fourth quarter numbers are not as bad as they look. Equipment and software investments grew strongly this quarter after experiencing the first decline since the start of recession in quarter three.

“Inventory numbers also played a large role in inflating the third quarter figures and deflating the fourth quarter data. Inventory accumulation added 0.7 percentage points to quarter three growth and inventory reduction subtracted 1.3 percentage points from quarter four. If you exclude the inventory rise and fall during the final two quarters of 2012, quarter three growth would have been 2.4 percent instead of 3.1 percent and quarter four would’ve seen 1.2 percent growth instead of a 0.1 percent contraction.

“The surprise – and maybe concern – is the decline in exports, which decreased 5.7 percent. But that number is based on very little data and is therefore likely-to-be revised in future GDP estimates.

“We should basically average quarter three and quarter four together to have a better view of our current economic growth rate.”

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