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Not As Bad As It Looks

Ford Motor production workers assemble batteries for Ford electric and hybrid vehicles at the Ford Rawsonville Assembly Plant in Ypsilanti Twsp, Michigan (REUTERS/Rebecca Cook).

My first response to the GDP report was “holy cow!”-- it’s not often that the U.S. economy contracts, and the headline says that this just happened in the final quarter of 2012. Many had expected weak growth; none had seen a contraction coming. But once you take a deep breath, read past the headline, and delve into the numbers, you’ll see that this is actually a pretty good (though not great) report. The internals are much better than the top-line belies. Under the hood, we see solid growth in both consumption and investment and as a result, private spending was humming along. Last quarter’s decline in U.S. GDP was all about inventories (which subtracted 1.3 percentage points from growth), as well as sharp cuts in defense spending. Neither of these are expected to persist.

And let’s not forget that this is the "advance" GDP estimate, which is only an early (an often inaccurate) guess as to what was happening. Typically, this estimate misses the mark by a full 1.3 percentage points.

I'm sure we will start seeing the use of the dreaded "R" word (recession). That's premature, and almost certainly wrong. The U.S. economy is growing, although probably slower than potential. Don’t let me overstate my sunny optimism though—the recovery is still precarious, and Congress could still blow it up.

Overall, there's nothing in today's GDP report to change my view: The U.S. economy was doing OK -- maybe even pretty well -- but definitely not great in the final quarter of 2012. While this morning's negative growth number is an attention grabber, realize it's for last quarter, it's an early guess, and it's contradicted by most other data which point to an economy that is still growing, although perhaps not fast enough.

And finally, a trivia question: When is the last time that the first big hint of bad economic news came from an advance GDP report? Answer: Never.

  • Justin Wolfers is a Nonresident Senior Fellow of the Brookings Institution, and a Professor of Economics and a Professor of Public Policy at the University of Michigan. He is a former co-editor of the Brookings Papers on Economic Activity, a Research Associate with the National Bureau of Economic Research; a Research Fellow with the Institute for the Study of Labor (IZA) in Bonn; a Research Affiliate with the Centre for Economic Policy Research in London; an International Research Fellow with the Kiel Institute for the World Economy, and a Fellow of the CESifo, in Munich. He was previously a visiting professor at Princeton, an Associate Professor at Wharton, an Assistant Professor at Stanford Graduate School of Business, and an economist with the Reserve Bank of Australia.