Wha??

According to the Bureau of Economic Analysis, the economy is, well was in the fourth quarter, contracting for the first time since 2009. It comes as quite a surprise to any non-doomsayer. The economy grew by 3.1% annualized in the third quarter, in the fourth it contracted by 0.1%. Granted, the "advance" report is revised multiple times; initially the advance report put third quarter GDP growth at 2% annualized. The fourth quarter number could be revised up, but will still be poor. 

The reported contraction was due in large part to reductions in government spending (mostly defense, which alone knocked 1.28% off growth), and in inventories. The reduction in inventories could indicate an expectation of worse growth going forward. Exports also took a hit, owing to a weak world economy.

On the other hand, the jobs data had the same middling growth during the fourth quarter, as in not indicating a worsening situation. Consumer spending and residential investment put in strong numbers as well.

It should become a bit clearer whether the good signs will be revised down or the bad signs revised up when the January jobs report and previous month revisions come out on Friday.

Graphs out of Context

Here is a graph:

This Year Should be Better

Economically, this year should be better than last; it should be the best year of the recovery so far. There are two main reasons why: the housing market and the Federal Reserve. 

The massive debt brought on by the crash is still slowly but surely being paid off. The number of homeowners who are delinquent or in foreclosure continues to drop, making housing investments less and less risky. 

Data is for the New York Fed district and not the whole county, but the general trend is the same.

Housing prices in real terms[1] and as a ratio to rental prices have dropped to pre-bubble levels. 

The average amount of time a home sits on the market before being bought has returned to average levels as well (between 4 and 5 months). Eventually simple demographics will take hold. The population of the United States continues to grow, and the number of people per household remains above average. The consultancy Macroeconomic Advisers projects that the United States will need an average of 1.6 million new houses per year over the next decade; in 2012 1 million were built. 

The Federal Reserve has been buying assets to create $40 billion of new money each month since September, and last month increased that amount to $85 billion. They have committed themselves to this level of money creation until unemployment is below 6.5%, so long as inflation remains stable. This will reduce the cost of borrowing and investing, and a bit of higher inflation would reduce the real value of debt over time and make exports more competitive. Generally speaking, it takes about six months for changes in Fed policy to have a real effect. 

So 2013 should be better than 2012, however politicians can still ruin it. 

December Jobs Report

155,000 jobs were created in December. The number is incredibly average for the disappointing recovery. The monthly average for 2012 was 152,900; the average for 2011 was 153,300. Such weak and consistent job growth puts the economy on track to recover all the jobs lost in the recession by March of 2015. But the population will be larger, so recovery to the rate of unemployment seen before the recession will take even longer.