This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

U.S. Economy Shrinks -- Time to Buy Stocks

NEW YORK ( TheStreet) -- The U.S. economy shrank in the fourth quarter for the first time since 2009, when the country was reeling from the worst financial crisis since the Great Depression.

That startled some investors, who are holding back on pushing the S&P 500 to new multi-year highs today. But the weaker-than-expected headline figure masks true trends in the economy: consumers are spending more freely, companies are generating fatter profits and housing is back in a big way.

The Commerce Department said Wednesday that fourth-quarter gross domestic product fell at an annualized rate of 0.1%, a sharp drop from third-quarter growth in excess of 3%. Most economists were surprised by the contraction.

Still, there are a few surprises in the report that back the bull market in stocks. (Investors put a record $55 billion of cash into stock funds in January as the S&P 500 and Dow Jones Industrial Average touch post-crisis highs.)

Consumer and business spending accelerated in the fourth quarter, even as Hurricane Sandy and the so-called fiscal cliff tempered things. Consumer spending rose 2.2%, compared with 1.6% in the third quarter, while business investment jumped at an annualized rate of 8.4%, reversing a third-quarter decline of 1.8%. Personal income gained sharply ahead of year-end tax increases.

Residential investment spending -- up a whopping 15.3% -- gave support to forecasts of rising home prices and demand.

So what caused the U.S. economy to stall in the fourth quarter?

Federal government spending fell at an annualized rate 15% after a gain of nearly 10% in the third quarter. Notably, defense spending tumbled 22.2%. The White House attributed defense cuts to a looming budget sequester. Meanwhile, inventories and exports turned negative after third-quarter gains.

Diane Swonk, an economist with Mesirow Financial, attributed the drop in defense spending to a pullback from wars in Iraq and Afghanistan and a sharp drop in research, development and weapons testing.

"Frankly, this is the best-looking contraction in GDP you'll ever see," Paul Ashworth, chief U.S. economist at Capital Economics, wrote in a note to clients. "First-quarter GDP growth is going to be pretty weak because of the expiry of the payroll tax cut. But there is nothing in these figures to change our view that U.S. GDP growth will accelerate as this year goes on."

"[On] balance, this report makes us more bullish," wrote Eric Green, an economist at TD Securities. The report "does nothing to shake our view that GDP will shift into the 2.5% to 3% range over the second half." He added that the headline numbers will likely reinforce the Federal Reserve's accommodative interest-rate policy.

Some investors are thinking the same way. Yields on the 10-year Treasury are now above 2%, a level not seen since April. Meanwhile, stocks are mixed in early trading Wednesday.

The GDP report may not tell the real story of corporate America. After all, earnings per share across the S&P 500 will advance more than 10%, according to analyst estimates compiled by Bloomberg. Revenue will rise in excess of 5%, surpassing even the most bullish forecasts on GDP growth.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AMZN $673.95 2.25%
AAPL $92.69 -0.59%
FB $119.49 1.43%
GOOG $711.11 1.40%
TSLA $214.93 1.61%


Chart of I:DJI
DOW 17,740.63 +79.92 0.45%
S&P 500 2,057.14 +6.51 0.32%
NASDAQ 4,736.1550 +19.0610 0.40%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs