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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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