Economic Performance in Q4 is....Hard to Get a Handle On

| Wed Jan. 30, 2013 11:01 AM EST

Economic growth turned negative last quarter, with GDP dropping 0.1 percent:

The drop was driven by a plunge in military spending, as well as fewer exports and a steep slowdown in the buildup of inventories by businesses. Anxieties about the fiscal impasse in Washington also contributed to the slowdown....The 22.2 percent drop in military spending — the sharpest quarterly drop in more than four decades — along with the drop in inventories and exports overwhelmed more positive indicators in the private sector, he said.

That's both odd and normal at the same time. It's odd because there's no real-world reason for military spending to jump around so much. A few percent from month-to-month, sure. But 22 percent in one quarter?

But it's also normal, because every quarter there's something like this when you dive into the internals of the GDP report. Final inventories rose or fell unexpectedly. State spending spiked or plummeted. Airplane sales or timber or durable goods or something showed an unusually big change.

So I guess my inclination is to simply take the headline number at face value: the economy was weak in Q4. Still, I'd temper that a bit. The military spending thing really is odd, and other economic indicators (employment, income growth, etc.) were reasonably strong last quarter. I wouldn't be surprised if we see some upward revisions to this.

On a political note, it would be nice if this report persuaded some people that government spending really does affect economic growth. Unfortunately, the kind of people who refuse to believe this seem to have a weird, walled-off section in the brains that makes an exception for military expenditures. Higher spending on bombs and aircraft carriers is good for the economy, but higher spending on bridges and electrical grids merely saps business from the private sector. I don't know if the anti-Keynesians really believe this or are only pretending to believe it, but it works out the same either way. A report like this won't change their peculiar views one whit.