Is the US Economic Recovery Going to Stop?

The first estimate of the change in the U.S. GDP for the fourth quarter of 2012 caused a big surprise in the markets. Most indications said the level of activity would result in a slowdown from the 3.1 percent recorded in the previous quarter, but not the 0.1 percent reported.

Does this indicate that a new recession is coming or, on the contrary, is it just a pause on the road to recovery that began toward the end of 2011?

To answer this crucial question there are three primary sources to consider: the breakdown of the evolution of GDP by aggregate demand, the current diagnosis of the economy by the Federal Reserve Bank and corporate profits.

A detailed analysis of these macroeconomic indicators leads to the following observations:

For the most part, the 0.1 percent decline was due to a sharp reduction in government spending (mainly military spending) and a sharp and unexpected drop in inventory levels.

Meanwhile, the main components of aggregate demand (which account for over 75 percent of GDP) have shown no signs of weakness. To the contrary, household consumption grew by 2.2 percent and private investment by 9.7 percent.

From this, one can conclude that the decline in GDP in the fourth quarter doesn’t indicate a future recession. Indeed, as we have seen, it is largely due to temporary factors, such as falling inventory and timely reduction of defense spending. The basic drivers of growth, consumption and private investment, have maintained their levels of expansion.

The current diagnosis of the Fed, issued after its last monthly meeting of Jan. 30, agrees with the conclusions drawn from disaggregated GDP.

Indeed, in the document in question, the Fed said recently the growth path has shown a “pause” due to “transient” factors or short-term factors, meaning, surely, the above issues, inventories and defense spending.

All indicators show clearly that the fall in activity levels of 0.1 percent in the fourth quarter was mainly due to temporary factors. However, in regard to the basics, the outlook is positive: Consumption and private investment continue to expand, the labor market, continues to strengthen.

Finally, in regard to corporate profits, the scenario is also auspicious: Of more than half of the company balance sheets presented to Standard & Poor’s for the fourth quarter, more than 75 percent of them have exceeded previous estimates. Also, the estimate of this year’s profits benefits (measured by the ratio of earnings per share), exceeded those recorded in 2012 by nearly 15 percent.