Real GDP Growth Negative in Q4 2012

Earlier this week, I posted the Q4 2012 GDP forecast from a new aggregate neural network model.  The model forecast was +2.2%, but the first official estimate of GDP growth in Q4 2012 was only -0.1%, which was the first negative quarterly GDP growth estimate since the Great Recession.  Still, the GDP number may not be as bad as it appears on the surface.

Q4 2012 GDP

There were two major drags on GDP in the fourth quarter.  Business inventories were drawn down and not replaced during the quarter.  During periods of economic growth, this typically leads to increases in inventory in subsequent quarters, which spurs future GDP growth. As a result, this effect may be temporary, rather than the beginning of a new trend.

Government spending dropped by 6.6% during the quarter, which further dampened GDP growth.  The decline in government spending could have been due to anticipation of the sequester.  This effect may persist if the sequester goes into effect, which is looking increasingly likely.

Unfortunately, government spending and fluctuations in inventory levels are not captured effectively by the explanatory variables in the neural network model, which accounts for the atypically large error this quarter.  Personal consumption expenditures (a major component of GDP) were up 2.2% during the quarter, which coincidentally was exactly equal to the model’s GDP growth forecast.

There will be two more revisions to Q4 2012 GDP during the coming months. However, at this time, the breakdown of GDP growth and the recession model forecasts show little evidence of a sustained downturn.

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Brian Johnson

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About Brian Johnson

I have been an investment professional for over 30 years. I worked as a fixed income portfolio manager, personally managing over $13 billion in assets for institutional clients. I was also the President of a financial consulting and software development firm, developing artificial intelligence based forecasting and risk management systems for institutional investment managers. I am now a full-time proprietary trader in options, futures, stocks, and ETFs using both algorithmic and discretionary trading strategies. In addition to my professional investment experience, I designed and taught courses in financial derivatives for both MBA and undergraduate business programs on a part-time basis for a number of years.
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