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JEFFREY BROWN:Whither the economy? That's been the question for quite a while now. Today, there was a surprising and perhaps confusing new twist.
The Commerce Department reported that gross domestic product actually shrank in the last quarter of 2012. The drop was small, one-tenth of a percent. But it was still the first time economic output had fallen in three-and-a-half years. Government spending dropped, most dramatically in the defense sector.
The report, though, also contained some positive developments. Consumer spending and business investment were both up. And yesterday, the so-called Case-Shiller index found that housing prices grew in 20 major cities by an average of 5.5 percent over the previous year. It was the biggest gain in six years.
We talk it through now with Joel Naroff, an economist who heads his own consulting firm in Pennsylvania, and Roben Farzad, a senior writer with Bloomberg Businessweek.
Joel Naroff, let me start with you. This really was a surprise to most people. What happened? What's behind the contraction last quarter?
JOEL NAROFF, Naroff Economic Advisers: Well, it was largely the government's doing between the largest cutback in 40 years in defense, which took well over a percentage point of growth out, and the fears of falling off the fiscal cliff, which caused businesses to be really, really cautious in their inventories and they fell dramatically, taking another percentage point or more out.
Those were the basic reasons. But, you know, as was noted, when you look at the fundamentals and the details of what's going on in businesses and households and housing, those are all solid. And I think that really says this economy has forward momentum, despite what the numbers seem to indicate.
JEFFREY BROWN:All right, well, I want to come back to momentum, but first—the first two points you made, first about government the cuts, and we have heard a lot about that, but the companies restocking at a slower rate, what does that—what's behind that? What does that tell you?
JOEL NAROFF: Well, I think really what happened was that businesses were really cautious, uncertain about whether or not we'd wind up going off the fiscal cliff.
And they made some very short-term decisions. It's easy just to keep the warehouses essentially empty. If we don't go off the cliff, they can refill them quickly. And so I think what happened during the end of the year was they just ran things very, very close to the vest, and now I think we will see in the first part of this year that they will have to rebuild it, and that will add to growth.
JEFFREY BROWN:Well, Roben Farzad, as we heard from Kwame Holman, the Federal Reserve referred to this as a pause in the economy. What do you see?
ROBEN FARZAD, Bloomberg Businessweek: The Federal Reserve has its foot on the gas, the pedal to the metal.
It is targeting unemployment now with inflation so benign. After all, unemployment is still perilously close to 8 percent. It's been above, I think, 7.5 percent for the longest stretch in the post-World War II period. And the Federal Reserve realizes there is so much slack in the
system, it's going to keep going out there, keep rates at painfully low levels to support homeowners, people who want to take out mortgages.
Obviously, corporations that can borrow at record low levels are loving this. And, oh, by the way, the stock market is at near record levels. I don't think many people on the street would appreciate that, but when and if they do remember their 401(k) log-ins and they go in there, they're bound to have a positive wealth effect for them.
JEFFREY BROWN:Well, tell us, Roben. On that, there have been report that small investors have been getting back into the market. They're a little bit more confident, I guess. Is that the case and what does that tell you?
ROBEN FARZAD: It's a paradox, in that small investors I think for the past three years have cashed out of stock mutual funds to the tune of $300 billion. Now, mind you, this was a three-year period that saw the stock market double. So it's really more evidence of that rather tragic buy high, sell low behavior that I think mom-and-pop investors have shown for many decades.
And now they're realizing, many of them, that they're going to need the money for retirement. Yields on savings, on bonds are so low that they have to go out there and get some more scratch, essentially, into retirement. And it's not just retirement. It's their children's education plans. It's thrown everything into question, this great economic calamity.
If you thought you were retiring at 65, maybe you have to push it back to 70. Are you going to have enough disposable income? Are you going to have to downsize out of your home? And I think the Federal Reserve is still mindful of that and wants to be as accommodative as possible for as long as possible.
JEFFREY BROWN:Well, Joel Naroff, coming back to the signs you were seeing of potential growth, the market, other factors, address the consumer issue and the confidence issue. What signs do you see?
JOEL NAROFF: Well, there's actually two opposite things that's going on.
They're saying that they're losing confidence. The recent confidence numbers were down fairly sharply. At the same time, almost all the data that's related to consumer spending, whether it's retail sales, vehicle sales, housing market, which is really an indication of consumer confidence, are all going strongly.
So I think, if you look at what they're doing, not what they're saying, the consumers are still voting with their dollars that things are going to get better. Now that taxes are increased, we have got to see how they're reacting to that, but up until this point, almost everything pointed to stronger consumer spending. And that,I take as a positive sign.
