America's economy

Stumble or worse?
Jan 30th 2013, 16:08 by R.A. | WASHINGTON



AMERICA has lately seemed to levitate above the economic difficulties plaguing other rich countries, from
Europe, to Britain, to Japan. This morning's news, that the American economy shrank at a 0.1% annual
pace in the last three months of 2012, may therefore come as a bit of a shock to many. A slowdown from
the 3.1% growth notched in the third quarter was expected, but outright contraction was not. The surprise
may fuel muttering about the threat of a double-dip recession, but the news is less bad than it seems.
Calling a new recession would be premature, for several reasons.
First, it is important to note that this is the government's advance report, which will subsequently be
revised several times. Growth in the third quarter was initially reported at just 2.0% before being revised
up more than a percentage point. Second, the bad number is driven by a few one-off peculiarities in the
data. Federal defence spending shrank at a striking 22% annual pace in the fourth quarter, knocking 1.28
percentage points off of growth. That was mostly (though not entirely) due to typical shifting of spending
into the third quarter ahead of the end of the fiscal year in September. (Correspondingly, the 0.64
percentage-point defence contribution to growth in the third quarter was somewhat overstated.) A big
change in private inventories also knocked 1.27 percentage points off of growth. Real final sales grew at
more than a 1% annual pace for the quarter, suggesting that underlying demand continues to grow, albeit
weakly.
Concern is not entirely unjustified, however. Exports turned in a particularly dismal performance, reflecting
in part the weakness across much of the world economy that will continue to be a source of worry for
America. Personal consumption helped carry the economy forward in the fourth quarter, growing at a
2.2% annual pace. The American consumer may have a harder slog in 2013, however, thanks to fiscal
tightening, and especially the lapsing of the payroll tax cut at the end of 2012. Other cuts may loom; if
planned spending cutsthe "sequester"are allowed to take place, defence spending will tumble even
more, dragging growth down with it.
But there are encouraging signs as well. Investment looked healthy in the fourth quarter. Equipment and
software investment rose at a 12.4% annual pace. Perhaps more heartening was the 15.3% surge in
residential investment, so long a drag on the economy. As the housing sector continues to strengthen, it
will provide a welcome bulwark against other headwinds. State and local government spending
subtracted slightly from growth to end the year, as it has done for most of the past three years, but that
too should soon switch back to positive contributions.
All in all, the fourth quarter performance is more warning shot than recession indicator. Underlying growth
is positive but vulnerable to disruptions from abroad or from Washington. Now is no time for careless
policy.