U.S. GDP Dips Due To Lower Inventories & Defense Spending; Prices Moderate

The economy felt the full effect of businesses' efforts to reduce inventories last quarter and lower defense spending. Real GDP fell 0.1% (AR) in Q4'12 (+1.5% y/y) following an unrevised 3.1% rise in the third quarter. It was the first decline in activity since Q2 of 2009. A 1.2% increase had been expected. For all of last year, real GDP grew 2.2%, an improvement from 1.8% in 2011.

Inventory decumulation subtracted 1.3 percentage points from economic growth last quarter. All of the reduction occurred in the nonfarm sector.  That decline followed a 0.7% addition to growth in Q3. For the whole year, inventories added just 0.2% percentage points to economic growth, offsetting the 0.2 point subtraction in 2011.

Growth in domestic final sales was reduced by a 6.6% decline (-1.7% y/y) in government spending. Outlays were lowered by a 22.2% drop (-5.0% y/y) in defense spending. Offsetting the decline was a 2.2% rise (1.9% y/y) in personal consumption expenditures. That was fueled by a more-than one quarter gain (9.2% y/y) in outlays on motor vehicles. Spending on home furnishings & durable household equipment rose 4.2% (4.4% y/y) but apparel consumption slipped 0.4% (+1.4% y/y). Services outlays rose just 0.9% (1.2% y/y). Business investment recovered at an 8.4% rate (4.3% y/y) after its moderate Q3 decline. Residential investment also was strong, rising at a 15.3% rate (14.4% y/y).

The foreign trade sector acted as a drag on overall economic growth. The 0.3 percentage point subtraction from GDP growth was due to a 5.7% decline (+1.4% y/y) in exports which was accompanied by a lesser 3.2% drop (+0.5% y/y) in imports.

Price inflation moderated substantially last quarter as the chain type price index rose at a 0.6% (1.7% y/y) annual rate. That gain was the weakest in a year. For the whole the chain type price index grew 1.8% after a 2.1% rise in 2011. Domestic prices, however, rose at a steady 1.3% clip (1.5% y/y) last quarter (1.5% y/y). The index rose 1.7% for the full year, down from the 2.5% rise in 2011.

The latest GDP figures can be found in Haver's USECON and USNA databases; USNA contains basically all of the Bureau of Economic Analysis' detail on the national accounts, including the new integrated economics accounts and the recently added GDP data for U.S. Territories. The Consensus estimates can be found in AS1REPNA.