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Why U.S. GDP Contracted for First Time in 3.5 Years

UPublish story by Michael Lombardi

By Michael Lombardi, MBA for Profit Confidential

(Make sure to read my important comments today

about the stock market in “Where the Market Stands; Where it’s Headed” below.)

The U.S. economy, as measured by gross domestic product (GDP), contracted in the fourth quarter of 2012 for the first time in three and a half years. According to the Bureau of Economic Analysis, U.S. GDP “unexpectedly” declined 0.1% in the fourth quarter of 2012 from the third quarter. (Source: Bureau of Economic Analysis, January 30, 2013.) Economists were estimating growth of one percent in the GDP for the fourth quarter of 2012.

If the first quarter of 2013 proves to be weak for GDP again, the U.S. will have technically entered a recession once more.

What’s behind the contraction in GDP? Defense spending took the biggest cut in 40 years. (Source: Associated Press, January 30, 2013.) But there are other troubles brewing.

Sure, government spending declined. In the fourth quarter of 2012, federal government spending declined 15% in the U.S. economy compared to an increase of 9.5% in the third quarter. Defense spending decreased 22.2% in the fourth quarter, compared to the 12.9% increase in the third quarter of 2012.

Looking deeper into the Bureau’s report, we discover:

• Exports of goods and services adjusted for price change from the U.S. economy fell 5.7% in the fourth quarter. In the third quarter of 2012, exports rose 1.7%.

• In the last quarter of 2012, businesses in the U.S. economy produced less than they did in third quarter of 2012. Inventories increased only by $20.0 billion in the fourth quarter, compared to a $60.3 billion increase in the third quarter and $41.4 billion in the second quarter of 2012.

• The output gap of the U.S. economy—the difference between actual output and what the economy can potentially produce—was $885.4 billion in 2012.

Yes, the stock market is rising (see my “Where the Market Stands; Where it’s … Read More


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