Does Limited GDP Growth Indicate Better Things to Come?

While Europe finds itself still shrouded in the dark veil of the debt crisis, the U.S. is looking at decidedly brighter skies, as the economy continues its positive trajectory. While growth remained slow in the final months of 2012, stronger business spending helped advance the nation’s gross domestic product at a 0.4 percent annual rate between October and December, the Department of Commerce reported on Thursday.

Though Washington has been locked in a bitter battle over budgetary issues, among other closely watched topics of controversy, companies are still looking to expand, tired of waiting on an indecisive Congress. But like the government, businesses are being cautious — last quarter’s GDP gain is the second-weakest reading since the current recovery began in the second half of 2009. Still, the economy has now grown for 14 consecutive quarters, and GDP advanced 2.2 percent in 2012 alone.

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However, there’s hope on the horizon as the first quarter of 2013 comes to an end. The housing market has been showing further improvement, as has the job market. New home sales in February were up 12.3 percent over the last twelve months, and the market for new construction has grown this year. Meanwhile, jobless claims have been consistently below 400,000 week to week, which is the tipping point between growth and contraction in the labor market. Though the Department of Labor today reported claims rose by 16,000 to 357,000, halting a downward trend, the four-week average before this morning’s report was at its lowest level in five years…

This seems to be a common trend in economic releases this week — progress continues, but is at the same time being held back. GDP grew more in the last quarter of 2012 than the previously reported 0.1 percent, or the originally reported contraction (today’s report was the third and final for the quarter), but growth was still well below the 3.1 percent gain in the third quarter of 2012. Economists surveyed by Dow Jones Newswires expected GDP growth of 0.5 percent for the year-ending quarter.

Still, there’s one aspect of the fourth-quarter GDP report that shines brightly: business fixed investments rose 13.2 percent, thanks in large part to stronger construction spending. Additionally, the trade gap narrowed as the deficit between U.S. exports and imports shrank to $384.7 billion from $395.2 billion in the July-September quarter. The narrowing contributed one-third of a percentage point to growth in the 3-month period, compared to a previously reported 0.24 point. This month’s upward revision also reflects higher estimates for foreign military sales and defense contracts.

Corporate profits were also up for the quarter, though they didn’t log as strong a showing as in the previous three months. Profits after taxes and not adjusted for inventories and capital consumption increased 1.8 percent from teh third quarter, and were up 13.3 percent for the year. Consumer spending, too, helped contribute to overall growth, as did the housing recovery.

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On the flip-side of the coin, readings on government cutbacks were revised slightly but are still dragging on overall GDP. Federal spending was cut a whopping 14.8 percent in the final three months of 2012, as defense spending declined 22.1 percent. Agencies were likely cutting spending in anticipation of across-the-board budget cuts that were ultimately delayed to March 1. But despite significant cuts having already been made, many economists believe that federal spending reductions will continue to drag on GDP in 2013. State and local spending was also lower in the fourth quarter…

Business inventories also subtracted from GDP growth in the fourth quarter, but that could be a positive indicator for the current quarter, as many businesses may have had to restock in order to meet demand.

Federal Reserve Chairman Ben Bernanke made it clear last week that the central bank will continue its unconventional policy of quantitative easing despite positive economic indicators and an improved labor market, though he added that the Fed might slow its bond-buying programs if the economy continues to show improvement. The Fed said last week it expects GDP to expand between 2.3 percent and 2.8 percent this year.

Separately, the general analyst consensus for the current January-March quarter, which ends this week, is for 2.5 percent growth. With recent improvements in the job market, consumer spending has kept up, while housing reports this year clearly show momentum heading into the busiest buying months.

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All in all, though GDP was slightly lower in the fourth quarter than had been wished, various economic reports in the New Year indicate an acceleration in the pace of growth as consumers ramp up spending and corporations ramp up hiring. Expect a marked improvement in GDP figures for the January-March quarter, and continuing growth in 2013, political turmoil be damned!

Here’s how the 3 major stock indices rounded out the shortened holiday trading week:

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