GDP Contraction Could Lead To U.S. Market Corrections

Includes: BA
by: Julie Young

Fourth-quarter GDP decreased 0.1 percent from the previous quarter, according to a January 30 release by the Bureau of Economic Analysis. The 0.1 percent decrease followed a 3.1 percent increase in the third quarter of 2012 and brings the seasonally adjusted annual rate of U.S. GDP to $13.7 trillion.

At a decrease of 0.1 percent, the quarterly rate of GDP growth is 1.1 percent lower than the consensus from MarketWatch economists.

A main factor leading to the lower-than-expected GDP growth for the quarter was a reduction in federal government spending, which had a negative contribution to GDP of 1.25 percent for the quarter.

BEA comments on the decrease in federal government spending are included below:

Federal government spending

Fourth-quarter federal government spending decreased at a 15.0 percent annual rate, reflecting a large decrease in national defense spending. The decrease in national defense spending is based on the Monthly Treasury Statement for October, November, and December from the Department of the Treasury, which shows a large decrease in fourth-quarter outlays for Department of Defense-military programs other than for military personnel.

Other negative factors dragging on GDP for the quarter included private inventories and exports.

The fourth quarter's reported GDP contraction could lead to a market correction as many companies reduce their growth outlooks for the year ahead based on the growth rate of GDP. The lower GDP growth rate also signifies lower production levels in the fourth quarter, which could lead to decreased earnings realization for companies in the first quarter of 2013.

The trending decrease in federal government spending is also likely to impact U.S. companies that rely on federal government demand, such as The Boeing Company (NYSE:BA).

The Boeing Company reported 2012 earnings in its Defense, Space & Security business of $3.1 billion, a 3 percent decrease from 2011. It also projected revenue growth in BDS to be -6.5 percent to 3.3 percent in 2013. With the slowing GDP growth and downward trending federal government spending, Boeing's Defense business line could be even more sensitive to the downside risk than projected.

Other U.S. companies, similar to Boeing, that rely on federal government demand may also be at higher risk causing lower stock valuations for these companies from reduced revenue generation due to decreased federal government expenditures.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.