The U.S. Bureau of Economic Analysis released a hugely disappointing report on gross domestic product, but a look beneath the surface gives investors reason for optimism.
The U.S. economy contracted for the first time since early 2009 according to Wednesday's data. The 0.1 per cent drop in the annualized rate was well below the consensus economist estimate of a 1.1 per cent gain, and below even the lowest forecast of 0.3 per cent.
However, a look behind the topline number shows that a sharp decline in government spending was the primary culprit for the shortfall. A 22.2 per cent decline in defense spending, the biggest cut since the end of the Vietnam war, highlighted a withdrawal of government economic support that subtracted 1.3 per cent from fourth quarter GDP growth.
The sectors most important to the stock market continued to improve. Consumer spending showed significant gains, notably in the all-important auto and housing sectors. Vehicle sales added 0.62 per cent to economic growth and Bloomberg reports that auto sales in November and December marked the strongest consecutive months since 2008. Residential construction activity spiked higher to a 15 per cent annual rate, the best growth level since 1992.
Despite the bad headline number, the major investment themes driving equity markets higher appear to be intact. The increase in payroll taxes that accompanies the "fiscal cliff" settlement could slow consumer spending in the months ahead, but nothing in today's report conflicts with the narrative of an ongoing recovery in the U.S. housing market. Also, the increase in auto sales suggests that the pessimistic consumer sentiment survey results released Tuesday are not yet affecting the economy.
Scott Barlow