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From ZeroHedge:

Shrinkage: US Economy Declined By -0.1% In Q4

Submitted by Tyler Durden on 01/30/2013 08:40 -0500

A stunner out of the BEA which just reported a Q4 GDP of -0.1% that was leaps and bounds below the 1.1% estimate, and a plunge from Q3's 3.1%. The factors: Private Inventories, Exports and Government Expenditures all of which contracted, by -1.27%, -0.81%, and -1.33%. The silver lining was in Personal Consumption Expenditures which added 1.52% to the negative print, most of it however driven by a surge in spending ahead of the fiscal cliff. Ironically, this was the biggest government-driven detraction from growth since Q1 2011, when GDP led to a -1.49% cut in the GDP, same in Q4 when government spending on defense fell the most since 1972. The solution is simple: print moar drones. Enter Mali. And since everything is now AMZN-ing, we can't wait for the spin that the GDP's margins were actually better than expected, leading to a 200 point surge in the DJIA.

Analysis from Wells Fargo:

Real Final Sales Up on Consumer and Residential Investment

Obviously, defense spending overstated third quarter GDP and depressed fourth quarter GDP. Therefore, we reemphasize the point that real private final sales to domestic purchasers provide a good benchmark for the underlying strength of the economy and remove some of the volatility due to inventory swings and government spending. Real private domestic final sales illustrate two characteristics of the U.S. economy today that are often lost in the hype of GDP. First, note the relative stability of sales over the past few years. There is a sense that underlying domestic demand has been remarkably stable overall while relative strength has shifted between sectors. Second, note how the pace of sales in the current expansion has clearly downshifted from prior expansions. This reinforces a theme we have often presented that growth in the current expansion has indeed settled into a slower growth pattern compared to the past and the expectations (hopes) of some analysts.

The Pluses: Consumer Spending and Housing—Yes, Housing

Personal consumption and residential investment carried the water in the fourth quarter. Personal consumption was up 2.2 percent in the fourth quarter and up 1.9 percent during all of 2012. Real disposable income grew 1.5 percent in 2012 and we expect it to return to that growth rate in the second half of 2013 after the hit from higher payroll and income taxes in the first half of this year. Residential investment registered double-digit gains in the second half of 2012 and we expect that momentum to remain in 2013. We anticipate that housing starts will pick up to a one million-unit pace by the fourth quarter of this year compared to a 900,000-unit pace in the fourth quarter of 2012. Earlier this week, the Case-Shiller Home Price Index was up 5.5 percent year over year for November—a very good sign.

Analysis from ISI:

GDP Report Has Limited Signal

It’s hard to believe that nominal GDP was almost +6% in 3Q or close to 0% in 4Q. In any event, the dark spot in 4Q real GDP was the plunge in defense spending. The bright spots were significant increases in housing and capital spending. Real consumer spending was +2.2%. The saving rate increased to almost 5%. Real DPI was +6.8% (bonuses paid early and special dividends). The deflator was a hard-to-believe +0.6% a.r. The plunge in inventories is a positive for 1Q.

Analysis from Morgan Stanley:

* Weaker than expected report. However, the bulk of the downside relative to our own below consensus estimate was in the defense category. Otherwise, the results were reasonably close to our expectations.

* The defense decline of 22% was the sharpest since 1972. It had nothing to do with the fiscal cliff or the looming budget sequester. Instead, the drop reflects the combination of two factors: 1) an underlying moderation in defense outlays that has been evident over the past couple of years reflecting a gradual wind down of the US military presence overseas and 2) payback for an unusual spike in spending that was seen in Q3. Over the four quarters of 2012, defense was down 5%. And, over the four quarters of 2011, defense fell 4%. This downtrend will intensify in 2013 if the budget sequester is imposed as scheduled in March.

* The inventory results in Q4 -- a 1.2 percentage point subtraction -- were very close to what we had been assuming and thus the report had little impact on our assessment of GDP growth in Q1. We will have a firmer grasp on the Q1 outlook after the monthly detail is released tomorrow, but at this point we see Q1 GDP tracking at about +1.5%.

* Consumption was right on expectations at +2.2% -- a bit better than the average pace seen over the past year or so. Residential investment continues to be a bright spot, rising 15.3% in Q4 -- close to expectations and close to the average growth pace seen over the prior four qtrs.

* Relative to our estimates, there were modest upside surprises in business capital spending and net exports. However, these were more than offset by the much larger than anticipated pullback in defense.

* The Q4 inflation results were quite benign with the headline deflator at +0.6% while the core PCE price index rose just +0.9%.

* Because of the statistical noise in the defense and inventory components in recent quarters, it is appropriate to average the Q3 and Q4 results to better gauge the underlying performance of the economy. On that basis, GDP was up 1.5% -- which is right in line with the growth pace seenin recent years. Wealth creation associated with the rally in equities and the ongoing improvement in the housing market could create a virtuous cycle at some point. But, for now, the recovery remains quite sluggish and the US economy still faces some important policy risks ahead.

From National Review:

Ignore the Topline GDP Number
By Bob Stein
January 30, 2013 11:15 A.M.

As we wrote last week: ignore the GDP headline, which was likely to be weak, but misleading.

As it turns out, the headline was even weaker than we thought, coming in (slightly) negative for the first time since 2009 and lower than any forecast from the 83 groups making predictions. We thought inventories would subtract 1.3 points from the GDP growth rate and got that exactly right, but government purchases also subtracted 1.3 points from the growth rate of real GDP, due to the largest drop in defense (relative to GDP) since the wind-down in Vietnam in 1973.

The 0.1 percent annual rate of real GDP contraction is misleading because the key components of GDP — personal spending, business investment, and homebuilding — were all rising, and came in at a combined 3.4 percent annual growth rate, exactly as we forecast. Reductions in inventories and government purchases may hurt in the short run, but looking ahead to 2013 we think these cuts are a positive: Lower inventories mean more showrooms and shelves to be stocked; less government spending means lower deficits and the potential for lower taxes (or fewer future tax hikes).

For now, we maintain our forecast that real GDP will grow in the 2.5 percent to 3 percent range in 2013, but think the chance of an upside surprise modestly outweighs the risks of a disappointment.