The U.S. economy grew moderately in 2012 as the recovery continued, but joblessness remained high and several headwinds constrained activity. The Bureau of Economic Analysis (BEA) measured real GDP growth at 2.2% from the 2011 annual level to the 2012 annual level; on a separate fourth-quarter-to-fourth-quarter basis, growth was 1.7%. Housing and consumer spending improved, inflation was subdued, and the Federal Reserve expanded monetary support while fiscal restraint and uncertainty weighed on the outlook.
How fast did the U.S. economy grow in 2012?
The BEA’s third estimate, released March 28, 2013, put real GDP growth at 2.2% comparing the 2012 annual level with the 2011 annual level, up from 1.8% on the same basis in 2011. That annual-level figure is not the same as growth over the four quarters of 2012: real GDP increased 1.7% from 2011 Q4 to 2012 Q4.
The distinction matters because the annual-level comparison uses each calendar year’s average output, while Q4-to-Q4 compares activity at the end of one year with activity at the end of the next. The Federal Reserve’s February 2013 report described real GDP growth as averaging about a 1.5% annual rate in each half of 2012, a quarterly-rate description rather than either BEA annual comparison. BEA, “Gross Domestic Product, 4th quarter and annual 2012 (third estimate)”; Federal Reserve, Monetary Policy Report, February 26, 2013.
What supported growth—and what held it back?
On the annual-level comparison, personal consumption, nonresidential fixed investment, exports, residential investment, and inventory investment contributed to real GDP growth. Federal and state and local government spending detracted. The pattern points to continued private-sector expansion alongside restraint from government outlays, rather than a recovery driven by every part of the economy.
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The Federal Reserve characterized output growth as moderate and identified several headwinds: declining real government purchases, weak foreign demand, concerns about the economic outlook and year-end fiscal policy, and financial strains in Europe. Housing had been weak and credit remained tight for some households and businesses. A severe drought reduced farm production, while Hurricane Sandy likely held back fourth-quarter economic activity somewhat. In contrast, housing’s recovery gained traction, consumer spending rose moderately, and business investment increased further. Federal Reserve, Monetary Policy Report, February 26, 2013.
How did employment change?
Labor-market conditions improved gradually, but the Federal Reserve still described them as weak. Nonfarm payrolls grew by about 175,000 jobs per month on average in the second half of 2012. The unemployment rate fell from 8.2% in the second quarter to 7.9% in January 2013; those are period-specific readings, not an annual-average unemployment rate for 2012.
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Finding work remained especially difficult for people unemployed for an extended period: about 40% of unemployed people in 2012 Q4 had been out of work for more than six months. Payroll growth and the unemployment rate describe different parts of the labor market, and neither alone captures the persistence of long-term unemployment. Federal Reserve, Monetary Policy Report, February 26, 2013.
Was inflation high in 2012?
Price growth was subdued in the Federal Reserve’s account. The PCE price index rose at about a 1.5% annual rate in the second half of 2012. Separately, the BEA reported that the gross domestic purchases price index rose 1.7% comparing the 2012 annual level with 2011, and 1.6% from 2011 Q4 to 2012 Q4. These are different measures and comparison periods; neither BEA figure is a CPI reading. Federal Reserve, Monetary Policy Report, February 26, 2013; BEA, “Gross Domestic Product, 4th quarter and annual 2012 (third estimate)”.
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What did fiscal policy mean for the economy?
Federal finances were a measured condition and a source of uncertainty about future demand. The federal unified budget deficit was $1.1 trillion in fiscal year 2012, equal to 7% of nominal GDP. This is a federal fiscal-year figure, not a calendar-year deficit. Federal debt held by the public was 73% of nominal GDP in 2012 Q4.
Federal purchases continued to decline in the second half of the year, reflecting deficit-reduction efforts and the drawdown of overseas military activities. At the turn of the year, households and businesses faced uncertainty over U.S. fiscal policy, and the possibility of a sharper fiscal contraction was a downside risk. Federal Reserve, Annual Report 2012; Federal Reserve, Monetary Policy Report, February 26, 2013.
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How did the Federal Reserve respond?
The Federal Reserve kept its federal funds target range at 0 to 1/4 percent through the second half of 2012 and added monetary accommodation at its September and December meetings. The measures included purchases of longer-term securities and stronger forward guidance about the outlook for policy rates.
Earlier in 2012, the Fed had extended its expectation of exceptionally low rates through late 2014 and continued the Maturity Extension Program through year-end. These actions describe the policy response; the cited official assessments do not establish a precise amount by which they raised GDP. Federal Reserve, Annual Report 2012; Federal Reserve, Annual Report 2012—Monetary Policy Report of July 2012.
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2012 was a year of moderate recovery rather than a return to broadly strong growth. Consumer demand, business investment, exports, and a firmer housing sector supported expansion. Employment improved, but unemployment and long-term joblessness remained elevated. Price increases were modest, while declining government purchases, fiscal uncertainty, weak external demand, tight credit for some borrowers, drought, and storm disruption limited momentum.
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