A closer look at the details will show that the headline figure of -0.1 percent is not indicative of the true underlying pace of economic growth.
Most importantly, a 6.6 percent decrease in government spending in the quarter subtracted 1.33 percent from the overall Gross Domestic Product growth figure. This decline in government spending was due to a 22 percent drop in defense spending in the quarter - the biggest such decrease in defense spending in several decades.
The second big factor affecting overall growth in the 4Q was a decrease in the rate of inventory growth, which subtracted another 1.27 percent from the overall growth rate. Inventory growth was negatively (and temporarily) affected by poor weather, including Superstorm Sandy and the summer droughts in the Midwest. Together, the decrease in defense spending and the decrease in inventory growth subtracted 2.6 percent from the reported 4Q growth rate.
(Read More: GDP Shows Surprise Drop for US in Fourth Quarter)
Adjusting for these two items, GDP would have grown 2.5 percent in the quarter - a deceleration from the 3Q rate of 3.1 percent but faster than the average of 2.1 percent since the end of the Great Recession.
(Read More: Fed Keeps Stimulus Amid Signs of Weak Economy )
Meanwhile, the components of GDP that are critical in gauging the true strength of the economy were reasonably strong in the quarter. Most importantly, the largest component of GDP, Personal Consumption, grew 2.2 percent in the quarter. This pace of growth represents an acceleration from the second and third quarters of the year and should be greeted positively given the fears about the fiscal cliff and tax hikes. Secondly, Fixed Investment rose 9.7 percent in the quarter driven by 12.4 percent growth in Equipment & Software and 15.3 percent growth in Residential Construction. Again, these results are strong in the face of such fiscal uncertainty.
Below we show the contribution to GDP growth in the quarter by each of the major components of GDP. The drag from lower inventories is reflected within Gross Private Investment, more than offsetting the strength in Equipment & Software and Residential Construction.
Contribution to Change in 4Q GDP
- Personal Consumption 1.52%
- Gross Private Investment -0.08%
- Net Exports -0.25%
- Government Consumption -1.33%
- Total Change in GDP -0.14%