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By Jason Stipp and Robert Johnson, CFA | 02-06-2013 11:00 AM

Uncle Sam and the Economy

The U.S. government's contribution to GDP and the labor market will continue to shift going forward, says Morningstar's Bob Johnson.

Jason Stipp: I am Jason Stipp for Morningstar. The government input into gross domestic product had a negative effect for the fourth quarter, but the role of government in the economy may also be changing over the longer term. Here to offer some insights on the fourth-quarter report as well as that role of government looking ahead is Morningstar's Bob Johnson, our director of economic analysis. Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: Let's talk about the fourth quarter. First, it surprised a lot of folks. On the downside it actually did show in that first read of the report contraction in the fourth quarter. Government [spending] was largely responsible. What's the story there?

Johnson: The government part was almost entirely on the federal government defense spending, and there there's a lot of difference between the way the private sector accounts for things. And the government, when they write their checks that's when it goes on the books as an expenditure. But in the meantime, the defense contractor may have been building that rocket or that plane or that radar system over many months and had a number of employees working on those projects, and lo behold the end of the project comes or they make a progress payment and that counts as spending. And meanwhile, the factory production line kind of keeps running at the same rate through all of that, and that's why we saw that employment looked fine in the fourth quarter. It showed considerable growth. It was a nice quarter for employment growth, but the government GDP number was so negative because they actually wrote fewer checks in that last and final quarter.

Stipp: Might you see the government contribution into GDP have more lumpiness because maybe some of the accounting practices that smooth out the numbers in the corporate world really aren't employed in the government world as you say?

Johnson: Exactly. And especially when you've got changing patterns here, with the winding down of programs, with threats of sequester, and with all sorts of timing issues on when checks go out to contractors. All of those things have kind of messed with the numbers a little bit. Historically, government has been a yawner. It's kind of like everybody worries about the other accounts, since government really doesn't make any difference. It kind of grows about the same as the economy. So, really, we haven't had a chance to really look at some of these details a lot over time because they haven't been important to, but now they are really making a huge difference.

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