Based on early estimates, economic activity closed 2012 on a mixed note. Though gross domestic product grew at two point two percent for the whole year, the fourth quarter results were disappointing, showing a 0.1 percent decline. A large 22. 2 percent cut in defense spending at the federal level (coming after a surprisingly high defense spending growth in the prior quarter) and a large negative change in private business inventories were key reasons for the mild contraction in the economy.
The year-end brought closure to several sources of uncertainty while opening new ones. The presidential election is over and the “fiscal cliff” uncertainty was partially solved by allowing some provisions to revert to normal (the payroll tax returning to 6. 2 percent), while kicking the can down the road on others ( sequestration). The housing market continued to firm up nicely with housing starts recording 27 percent gain for the year while new home sales rose 20 percent from the prior year. Existing home sales grew by 9.0 percent during the year, with shrinking inventories driving up prices of existing homes. Rising homes prices elevated homeowners’ housing equity by $1.5 trillion over the past two years. The housing wealth gain is helping consumers to hum along at around 2.0 percent growth. In light of these factors, SIOR members recorded a positive fourth quarter.
Looking at the yearly economic activity as measured by gross domestic product (GDP), most major components posted positive growth. Based on the Bureau of Economic Analysis’s first estimate, both consumers and businesses increased their spending over 2012. Consumer spending rose 1. 9 percent during the year, driven by a 7. 8 percent rise in expenditures on durable goods. Consumers spent more in 2012 on cars (up 7. 7 percent), furnishings and household equipment (up 5. 8 percent), as well as recreational goods and vehicles (up 10. 9 percent). Consumers spending on services also increased, by a more modest 1. 3 percent.
Private businesses, while maintaining a cautious attitude given the uncertainties present during 2012, upped their spending by 7. 7 percent over the year, the second highest annual rate since the recession. This increase was welcoming given the possibility of stalling from the fiscal cliff news headlines throughout the quarter. Spending on commercial structures rose 9. 6 percent, in a positive turn for commercial real estate. Companies also spent more on equipment and software, especially transportation equipment, which increased 17. 8 percent during the year. Spending on industrial equipment advanced 7.0 percent, while on information processing it grew by 3. 8 percent.