Ignore the bottom line of the GDP report. Key U.S. private sector demands were strong in the fourth quarter. Construction and business spending on capital goods surprised on the upside. And consumer spending rose at a 2.2 percent rate. Overall GDP gains were held back because government spending fell sharply, business inventory growth slowed, and weakness abroad held back exports.
Such headwinds will continue in 2013. Many European economies are in recession. The budget battles of last year ended up raising payroll taxes starting this month, and some further tax hikes are coming for higher income groups. But don’t interpret the preliminary fourth quarter GDP report as a signal that the economy is going into the new year on an already flat trajectory. Indeed, the employment report that came out alongside the GDP this morning shows reasonable job growth continues. That’s a more robust indicator of health than the bottom line of the preliminary GDP data.