As reported by the Bureau of Economic Analysis this morning, 4th quarter GDP (gross domestic product) accelerated to an annual rate of increase of 2.8% from the 3rd quarter’s pace of 1.8%. The stock market fell in response. Why? Because contrary to the rosy economic news that we got during the 4th quarter – driven by booming holiday sales, this GDP report paints a different picture. Of that 2.8% increase, most of it – 1.9% – was due to nothing more than increases in inventories, and rising inventories are never a good sign for the economy. Strip that away and the real increase in GDP falls to a measley 0.8%. Or, worse, if the increase in inventories results in slowdowns in production driven by inventory control, we could actually see a slowdown in the 1st quarter of this year.
Expressed in per capita terms, the news is even worse, of course. Take away inventory growth and the per capita rise in GDP falls to zero. In other words, there’s a very real possibility (or even a likelihood) that the economy has stalled. Worse yet, federal spending under the American Recovery Act (the “stimulus” plan) is nearly finished. And now the pentagon is in the process of slashing costs. Additionally, the cut in payroll taxes is due to expire in a month, and it’s no sure thing that it will be extended; and it’s very unlikely to be extended without corresponding cuts in spending that will pull as much out of the economy as the tax break puts in. All of this taken together spells big trouble for the economy. It’s no wonder that the Federal Reserve vowed to keep interest rates at zero for another three years.
For all of these reasons, I stand behind my prediction that 2012 is going to be a bad year for the economy. The tactic of using debt to mask the effects of the trade deficit has been exhausted and the trade deficit is steadily getting worse.
The following is a chart of GDP per capita: Real Per Capita GDP. Note the convergence of the two lines -GDP per capita with and without stimulus spending – now that the stimulus spending has been virtually exhausted.