The Commerce Department reports that the U.S.’s gross domestic product shrank by .1 percent in the fourth quarter of 2012. Initial reports are often revised, but this unexpected decline in the economy is a sharp reminder that the recovery — if it exists at all — is fragile and threatened by impending cuts in government spending.
Despite this shock, other economic indicators suggest a mixed outlook.
The day before the GDP report, the Dow Jones Industrial Average tested 14,000, a height not seen since 2007. Wednesday morning, ADP reported that the private sector created 192,000 jobs in January — analysts expected 175,000. According to The Conference Board, consumer confidence dove 8.1 percent in January following a decline in December. But according to Gallup, consumer confidence has surged to a five-year high.
What caused the shrinkage of GDP growth? The White House blames Hurricane Sandy, which disrupted and destroyed $44 billion in economic activity.
But cuts to government spending, a.k.a.”austerity,” also played a major role.
“A decline in government outlays and smaller gain in stockpiles subtracted a combined 2.6 percentage points from growth,” reports Bloomberg‘s Shobhana Chandra & Michelle Jamrisko. In particular, Defense spending erased any growth that the private sector racked up in the last three months of the year. “Government outlays dropped at a 6.6 percent annual pace from October through December, subtracting 1.3 percentage points from GDP. The decrease was led by a 22.2 percent fall in defense that was the biggest since 1972, following the Vietnam War.”
“Austerity, it turns out, detracts from growth,” writes The Daily Beast‘s Daniel Gross.
The Guardian’s Heidi Moore laid the blame for the shrinking economy on the budget standoff in Washington, D.C. “Washington’s idiotic battle over the fiscal cliff is what [made the economy shrink],” she writes. “The automatic tax hikes and government spending cuts set to go into motion would have hurt a wide swath of American people. CEOs were particularly loud about the need for Washington to come to some kind of decision.”
However, reports suggest businesses didn’t cut back as a result of the “fiscal cliff.”
Cuts in government spending, which Republicans insisted would lead to economic growth, have led to shrinking economies across Europe. The U.S. had been able to maintain growth with the federal government making up for the cuts to state and local governments. However, with the impending sequestration looking more likely to happen and the payroll tax cut expired, more austerity is on the way.
However, some, including Bank of America’s Michelle Meyer, are still very optimistic about growth and think that the GDP number was actually good, given the defense cuts and reduced farm inventories due to drought.
Business Insider‘s Joe Weisenthal was even more upbeat, noting that the “bad” number is largely the result of war drawdown, while consumers and business continued to spend.
“So, less war, more business investment. This was a good report.”
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