The data has not been kind to the economists and reporters who were hyping the line that uncertainties over the fiscal cliff were slowing growth last year. Strong consumption data, capped by a jump in retail sales in December seemed to dispel the idea that consumers were being cautious due to cliff concerns. Durable goods orders, led by a big jump in capital goods orders in November, suggested that businesses were acting as though the outcome of the standoff would not have a big impact on the economy.

Yesterday's release of data on 4th quarter GDP should have been the final death knell for the fiscal cliff economic drag story. There was strong growth in both equipment and software investment by businesses and purchases of durable goods by consumers. Obviously these folks didn't get the memo about being cautious.

But Joel Naroff, an economist with his own consulting firm, was not giving up so easily. On the PBS NewsHour last night he told viewers:

"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."

If Naroff is looking for empty warehouses he better look at the data again. Businesses did not "keep the warehouses essentially empty" in the 4th quarter. Businesses increased non-farm inventories at a $43.8 billion annual rate in the fourth quarter, a pretty health rate. This was a drag on growth because they reportedly increased inventories at an extraordinary $88.2 billion annual rate in the third quarter. In other words, businesses went from adding inventories at a very rapid pace to adding them at a more normal pace. They were not letting their warehouses sit empty. Since GDP is measuring the change in the rate of change, a slower rate of accumulation is a drag on growth.

Call that one strike three for the fiscal cliff fearmongers.



Morning Edition committed the same sin: intro econ textbooks all around. Is our economists learning?