Feb. 7, 2013
The news that the U.S. economy contracted in the fourth quarter of last year came as quite a shock. Not a single one of the 24 economists surveyed by Dow Jones to develop the "consensus estimate" predicted an economic contraction. The Federal Reserve’s January Beige Book, which collected data through the end of the year from twelve different regions of the country, characterized, “the pace of [economic] growth as either modest or moderate.”
Of course, the economic consensus being wrong should come as no surprise. In September 2008, when the nation was in the midst of the worst recession in over 70 years, the Wall Street Journal’s survey of 50 economists expected growth of over 1%, and only 3 of the 50 forecast negative growth.
Why was the consensus off again? To answer that we need to start with what turned the economy from a path of growth to contraction. Two main culprits stick out: A decrease in the growth of private inventories, and the sharp slowdown in government spending mainly at the federal level. Absent these two factors, the economy would have grown by 2.5%.
The growth hit from inventories can be seen in two ways. A positive interpretation is that a drawdown of current inventory levels may set the stage for stronger growth as businesses restock their shelves. A negative interpretation is that businesses are looking ahead and preparing for weaker future growth. It is important to note, however, that personal consumption remained strong in the fourth quarter, rising by 2.2% at an annual rate. Business investment also grew at a brisk pace, further suggesting underlying strength in the economy. When you consider that personal consumption and business investment account for more than two-thirds of GDP, it is even more remarkable that the economy contracted in the fourth quarter.
Klein is the director of the Bipartisan Policy Center’s Financial Regulatory Reform Initiative. Previously, Klein served at the Treasury Department as the deputy assistant for economic policy, policy coordination.
Read the full op-ed here
Financial Regulatory Reform Initiative