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Posted by on Jan 30, 2013 in Education, Featured | 9 comments

A Harbinger or Not? U.S. Economy Contracts

A seeming setback for the recovery: the U.S economy has contracted:

U.S. economic momentum screeched to a halt in the final months of 2012, as businesses pared back inventories and government spending fell sharply, while lawmakers struggled to reach a deal on tax increases and budget cuts.

The nation’s gross domestic product shrank for the first time in three and a half years during the fourth quarter, declining at an annual rate of 0.1% between October and December, the Commerce Department said Wednesday.

It’s the first time the broad measure of all goods and services produced by the economy contracted since the post-financial crisis recovery began. Economists surveyed by Dow Jones Newswires had expected a 1.0% annualized growth.

The economy reversed from a 3.1% pace in the third quarter largely because federal government spending fell by 15% and private business inventories also decreased. Those drags and others were too much for solid consumer spending to overcome.

Still, for all of 2012, the gross domestic product advanced 2.2%, an improvement compared with 1.8% growth in 2011.

Economic output had expanded for 13 consecutive quarters, but improvement during the summer months was likely derailed by Washington policy makers’ inability to strike a comprehensive deal over pending tax hikes and spending cuts until the last minute.

Congress and the White House reached an agreement to avoid the worst of the fiscal cliff earlier this month, but economists have said payroll-tax increases and continued worries about delayed budget tightening are likely to drag on the economy early this year.

The decline in federal spending was the largest drop since 1973. Spending at all levels of government fell 6.6% in the fourth quarter.

Or is it REALLY bad news? CNN Money:

Uncle Sam cut spending and businesses drew down inventories in the fourth quarter of 2012, causing the U.S. economy to contract for the first time in more than three years.

But don’t start throwing around the R-word just yet.

“No one I know would seriously call this an indicator of recession,” said Bill Hampel, chief economist with the Credit Union National Association.

Gross domestic product, the broadest measure of the nation’s economic growth, contracted at an annual rate of 0.1% from October to December, the Commerce Department said Wednesday. It was the first quarterly contraction since the second quarter of 2009, amid the Great Recession.

While a contraction is never encouraging, economists pointed to temporary effects that may have caused a one-time dip, and they see better growth ahead.

It’s “the best-looking contraction in U.S. GDP you’ll ever see,” Paul Ashworth, chief U.S. economist for Capital Economics said in a research note. “The drag from defense spending and inventories is a one-off. The rest of the report is all encouraging.”
A large cut in federal spending, primarily on defense, was one of the biggest drags on growth. Defense spending contracted at a 22% annual rate.

Alan Kreuger, head of President Obama’s Council of Economic Advisers, attributed the deep decline to the looming sequestration deadline.

“A likely explanation for the sharp decline in Federal defense spending is uncertainty concerning the automatic spending cuts that were scheduled to take effect in January, and are currently scheduled to take effect on March 1st,” he said in a blog post.


Economists are predicting the U.S. economy will bounce back in the first quarter of 2013, and stay on trend with a 2% to 2.5% growth rate seen during the recovery.
A gradual housing recovery is likely to be a big contributor to that growth.

Meanwhile, sequestration remains a threat to the economy over the short term, as chances are growing that automatic, across-the-board government spending cuts may soon take effect. The cuts could slash the amount federal agencies are allowed to spend by $85 billion over seven months.

“Today’s report is a reminder of the importance of the need for Congress to act to avoid self-inflicted wounds to the economy,” Krueger said.

Weak global demand for American-made goods and services, particularly from Europe and China, also remains a concern.

“The momentum in the economy is positive, but not booming,” Hampel said.
Expect this to be a big topic of discussion today in the media, on talk radio and on weblogs. And expect to hear a partisan spin on these numbers, depending on the source.

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  • slamfu

    Well the govt has been injecting $1Tn into the economy for the last few years, while the “Makers” of the country have been keeping wages stagnant despite their growing profits. As we cut govt spending this was absolutely predictable, and modest I think. Its actually possible to shrink and become stronger at the same time. Now if we can just somehow get more money to the middle class so they can buy more stuff I think we would be better off.

  • merkin

    People are still paying off debt, it is easing off because bankruptcies and foreclosures are easing. The corporations are the only ones who are borrowing money but it is primarily to buy back corporate shares in order to keep the executive bonuses flowing by increasing share prices, not to invest in new production.

    Under these economic conditions it’s not possible to “shrink and become stronger.” A shrinking federal government budget deficit combined with the shrinking state and local government spending will push the economy in only one direction, down. It is quite frankly ridiculous to say that the US will get stronger if we weaken the economy.

  • zusa1

    slamfu, who do you think have been the beneficiaries of all this quantitative easing?

    “The question, though, is whether putting more profits into the hands of the top 5 percent will really generate jobs for the rest of America. So far, the evidence is not promising.””

  • dduck

    Oh, the economy, make a note to look into that.

  • KP

    Huh? Where? Never mind, I found it – over here on the back burner.

  • Two things:

    1) our inane Congress is tossing in enough uncertainty to keep our economy stagnant. Another debt ceiling debate? Give us a break.
    2) the big fundamental problem is STILL there, unhandled: we don’t make things here anymore! We can’t have a strong economy unless we make things. A service-sector, retail & consumption based economy is not sustainable. We need to make things again (and close our export/import gap) before we can truly grow.

  • dduck

    Barky, would completing the Keystone Pipeline which would create thousands of construction jobs and bringing tar sands oil down to the gulf coast for refining (jobs) and exporting the byproducts bringing bucks to the U.S. And, it would be nice if we could use some of that refined product to decrease our foreign oil imports.

    But, you are correct, we need to make things and with automation and rising labor costs in foreign lands plus the extra costs of transportation, maybe we can some day.
    Right now the only growth area is in the cyber-war field.

  • Dduck, if it can be done safely & without damaging watersheds, I’m fine. I’m just fearful the proper planning/studies have not been done.

    Jobs vs. clean water should not be a choice.

  • dduck

    Barky, my point is that it is going to happen and it could have shaved years off the start date and created jobs sooner.
    BTW: Fracking does far more damage than the pipeline will do in the U.S. However, in Canada tar sands are very bad for the environment so we get some spillover I guess.

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