F E B R U A R Y  2 0 1 3








Economic and Market Review

By: Ryan McCarroll
Risk Analyst


The U.S. economy as measured by GDP shrank by an annualized 0.1% in the 4th quarter of 2012. This marked the first contraction in economic activity in over 3 years. A more detailed look into the report gives some clues as to why many analysts view the report as less pessimistic than the headline would suggest. The two primary drags on GDP growth in the fourth quarter were a reduction in government spending; most notably defense spending, and a decrease in inventory investment. The drag from defense spending may well continue as a trend as the war in Afghanistan continues to wind down. The drag created from lower inventory investment however, could provide a boost to GDP in the current quarter. If inventory levels become depleted, businesses will be forced to invest in inventory to meet consumer demand. Two bright spots in the GDP report included a 12.4% increase in equipment and software investment by businesses and a 2.2% increase in consumer spending. Real GDP growth for all of 2012 came in at 2.2%, up from 1.8% in 2011.

Auto sales in January came in strong at a seasonally adjusted 15.2 million units, the best January reading since 2008. Analyst predictions, including Edmunds and LMC Automotive, target auto sales in 2013 to be 15 million units, a 4% growth rate. Auto sales remain below pre-recession levels, but have increased for 29 consecutive months. The last year over year decline in seasonally adjusted auto sales was August of 2010-one year after the expiration of the “cash for clunkers” program.

The upcoming release of the January retail sales data will provide a good indication of the extent to which consumer spending will be affected by the recent tax hikes. The subsequent release of the University of Michigan’s consumer sentiment reading will provide further color on the consumer’s willingness to contribute to growth in the first quarter. It is difficult to forecast the extent to which the wealth effect from the appreciation in the equity markets will offset the decrease in consumer take home pay.

The labor market in January continued its trajectory of modest gains. Total non-farm payrolls increased by 157 thousand during the month. In addition to the January numbers, the Labor Department revised its November and December numbers upward by a combined 127 thousand. To provide more context to the labor market recovery, since the recession began in 2007 the U.S. has recovered 5.5 of the 8.75 million jobs lost. At the 2012 run rate of 169 thousand jobs created each month, the labor market would recover all the jobs lost in approximately 19 more months.

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