FINANCE: Economy Stronger than GDP Indicates

By Patricia Kummer; Kummer Financial Strategies- Highlands Ranch
Posted

The saying goes, “Even a broken clock is right twice a day”.  That is a similar assessment to all the naysayers who have been predicting a double-dip Recession for the last four years.  Recession did not happen and hopefully will not be a self-fulfilling prophecy for some pessimists.  However the Gross Domestic Product (GDP) did slip into negative territory on the initial estimate for last quarter to a nominal -0.1 percent annual rate.

Looking deeper in to the numbers, the news is actually rather positive.  The decline was largely due to cuts in government spending.  True, this is the lowest number in more than three years, but many voters have been chanting the mantra, “smaller government “for quite some time.  Therefore, we may have to deal with slower growth to work towards a more fiscally responsible government.

The good news is that the basis of the domestic economy such as housing, consumer spending and business investment actually measured an increase.  The research firm Capital Economics calls the report “the best looking contraction in U.S. GDP you’ll ever see”.

The estimate for the U.S. economy for 2013 is predicted to expand at around two percent.  While we are getting tired of such a slow growth trajectory, I think this is much more sustainable and a welcome alternative to constant volatility.

The slight increase in unemployment to 7.9 percent did not even phase the stock market as February started off with a strong open after a stellar January.  The S&P 500 showed a six percent increase in January, the highest return for the first month of the year since 1997.

The Federal Reserve Board released some commentary after their January meeting stating “it appears that growth in economic activity paused in recent months, in large part because of weather-related disruptions”.  The Fed said it still saw some downside risks to the economy, even though it expected to see a return to moderate growth in the near future.

The GDP for 2012 increased at 2.2 percent, up from the 1.8 percent growth of 2011.  While this is still dangerously close to a flat or even declining economy, the U.S. has managed to stay positive until last quarter.

The consumer is returning and booked a decent holiday season.  Consumer spending adjusted for inflation increased at a 2.2 percent rate in the fourth quarter, up from 1.6 percent in the third quarter.  Due to an increase in after-tax income stated in the GDP report, workers are enjoying a 6.8 percent increase.  Keep in mind this could partially be due to the lower payroll tax rate during 2012 that has expired.

Given all of these economic data points, a recession does not appear to be a problem in the near term despite the negative GDP for one quarter.   Businesses appear poised for growth as consumers and investors are returning.  This is good news despite the unemployment increase which is likely volatile due to a difficult and slow economic recovery.

Patricia Kummer has been an independent Certified Financial Planner for 26 years and is President of Kummer Financial Strategies, Inc., a Registered Investment Advisor in Highlands Ranch. She welcomes your questions at www.kummerfinancial.com or call the economic hotline at 303-683-5800.Any material discussed is meant for informational purposes only and not a substitute for individual advice.