The Good News in a Bad GDP Report

If you're a contrarian, you ought to love the latest report on the direction of the nation's economy.

GDP shrank by 0.1 percentage points in the fourth quarter of 2012, a sorry performance suggesting the economy is even weaker than skeptical economists expected. If growth remains at that level for the next quarter or two, it would probably signal a recession.

But there's underlying good news in the GDP numbers, which means there could be upward revisions in the future showing the economy didn't shrink after all. Or, growth could snap back in 2013 to compensate for the weak end to 2012.

[READ: Economy Contracts for First Time Since 2009]

"Underlying growth improved with a solid gain in business investment," Bank of America Merrill Lynch advised in a research note. "We still see a roughly two percent economy."

Three factors dragged down growth at the end of 2012: A big drop in defense spending, a decline in business inventories and a drop in exports. But those changes alone may not be deep or lasting enough to threaten growth in 2013. "It would be a mistake to view this drop in GDP as a possible harbinger of recession," forecasting firm IHS Global Insight explained in a brief analysis.

That's because several things went right at the end of 2012. Consumer and business spending rose, and residential investment was strong, a sign that the housing recovery is strengthening and will continue to add to growth. Personal income rose and consumers saved more, which will add to financial security in 2013.

[NEWMAN: Blame Washington for GDP Dip]

The trick for economists and investors is figuring out which of those factors are temporary anomalies and which reflect longer-term trends. Government spending will probably continue to decline, given that $110 billion in spending cuts are due to kick in March 1. Those have already been delayed once, and could be delayed again, but at some point it seems likely that Congress will have to allow at least some of those cuts to go into effect, as a way to start addressing the humongous national debt. That's one big reason economists are predicting slow growth throughout 2013.

It's less clear what consumers will do in 2013. The year is off to a bad start, with tax hikes imposed as part of the fiscal-cliff deal cutting into disposable income and driving down confidence. But the GDP report shows consumers may have prepared for that by saving more, which could help sustain spending in 2013. The bigger question may be whether Congress helps stabilized the economy this year, or weakens it further, driving consumers and businesses back into the bunker.

[RELATED: Private Payrolls Added 192K Jobs Last Month]

The stock market remains relatively buoyant, reacting to the disappointing GDP news with a very modest decline. That could be because investors think the GDP drop is anomalous, masking better news about the economy. They may also feel that weak growth gives the Federal Reserve more reason to continue its aggressive quantitative easing policy, which generally boosts stock values.

Merrill Lynch believes forthcoming reports will show the economy to be stronger. "The economy is not exactly robust, but it is certainly not contracting as [the GDP] data would otherwise suggest," the firm said. It wouldn't be the first time numbers have deceived.

Rick Newman's latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.



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