Did Expiration of Accelerated Depreciation Artificially Inflate the 2.8% GDP Growth?

Gross domestic product from October through December expanded at a 2.8% pace according to the Commerce Department's preliminary report. Most of the commentary on the 4th Quarter GDP report emphasize that a large component of the increase was an unexpected buildup in inventories. However, little attention seems to be focused on the impact of the year end expiration of  accelerated depreciation.

Accelerated depreciation of 100% was permitted for capital expenditures if the items purchased were installed by the end of the year. The accelerated depreciation drops to 50% in 2012, increasing the after-tax cost of such outlays. Businesses have worked this tax gimmick to their advantage by pulling  outlays into 2011. This created an artificial boom/ bust cycle. While the bust will not be as dramatic as that caused by the forward buying that occurred in 1999 in anticipation of Y2K, it will likely be substantial. Just as the hangover from forward buying in 1999 was a factor in dot-com bubble bursting, the forward buying of capital equipment in 2011 will big a drag on capital expenditures during the 1st quarter of 2012.

It seems likely that the growth in the U.S. economy may stall during the 1st quarter of 2012. The following four headwinds will make growth challenging to achieve this quarter.

1. The hangover from the forward buying that occurred in order to take advantage of accelerated depreciation 
2. The inventory buildup suggests businesses accumulated excess stock and did not sell as much product as expected during the holiday season. Companies are likely to reduce this inventories during the first quarter of 2012 reducing demand for new sales.
3. The slow down in Europe may cut into exports during the 1st quarter.
4. Consumers are no longer getting the benefit of declining prices for gasoline and oil has returned to $100 dollars a barrel.

GasBuddy.com

Conclusion
The decline in stock prices this morning indicates how unimpressed investors are with the report of 2.8% growth in GDP. Just as accelerated depreciation gave the economy an artificial boost in the 4th quarter, the economy now has to overcome the artificial decline in activity this quarter due to purchases that were pushed into 2011 to take advantage of the tax break. Don't be surprised if growth in GDP stalls out this quarter.

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