Mixed signals: GDP down, stocks at 5-year high

Underlying details of GDP report offer encouragement

WASHINGTON — The U.S. economy shrank slightly in the final three months of 2012, yet stocks are within striking distance of all-time highs.

Is the economy stronger than the statistics say it is? Or are the financial markets getting ahead of economic fundamentals?

A little of both may be the answer.

The U.S. economy grew 2.2 percent for 2012, the Bureau of Economic Analysis reported Wednesday, also noting that the economy's gross domestic product, the broadest measure of sales of goods and services, actually contracted at an annualized rate of 0.1 percent from October through December.

That's the first time the economy has contracted in more than three-and-a-half years, and the blame partly falls on lawmakers in Washington who dithered until year end to lock in place tax cuts for 99 percent of Americans and threatened to default on the nation's existing debt obligations. The uncertainty weighed heavily on both consumers and employers late last year.

The good news in Wednesday's weak headline number is that the underlying details of the same GDP report tell a very different story.

"If you dig deep in the GDP numbers, you saw acceleration in consumer spending, you saw acceleration in housing, and very importantly you saw business fixed spending go from negative to positive," said Nariman Behravesh, chief economist for forecaster IHS Global Insight.

"In that sense, there is a lot of underlying good news in that number that is sort of masked by the headline."

A glass-half-empty view is that the economy didn't enter 2013 with a lot of steam. But Behravesh takes the half-full approach, noting the economy grew at an annual rate of 1.5 percent in the second half of 2012. "We think that we're on track for a first-quarter growth rate of about 2 percent, maybe 2.5 percent, and it will gradually pick up speed," he said. "At the end of the year, barring some craziness from Washington, we could get up to 3 percent."

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