If you missed the news, the US economy actually shrank by 0.1% in Q4 2012. The GOP is ecstatic. Jennifer Rubin has a post suggesting that this is an indictment of Obama's policies.
Let's all take a deep breath. Why did the economy shrink?
One of the best analysis of this is actually on the Wonkblog (as usual):
A significant reason for the contraction is that the drop in defense spending. Other reasons are that companies simply ran down inventories (possibly in anticipation of a slowdown resulting from the fiscal cliff?) and a sharp decline in exports driven by a global slowdown.
Good news #1: The inventories part if probably a one time blip and will correct itself.
Good news #2: government spending is down. The defense spending reduction it is speculated can be attributed to two things:
The Private sector has been growing at over 2% and possibly over 3%. If government spending had been flat, then the US economy's growth rate would have been north of 3%. However, between budget cuts agreed by Obama and state government cuts, there is a significant drag due to the public sector pull backs.
What this economic report underlines though is that if the sequester goes into effect, the US economy will be plunged into recession. Possibly a contraction of over 8%. Let me put that in perspective. That is a larger drop in US GDP than occurred in 2008-09. The fact is the costs have to be brought under control, but the question is whether causing a recession is the way to do it. Volcker's experiment in the 80s would suggest it may be OK. However, austerity experiments in UK and the EU in general call this into question.
Let's all take a deep breath. Why did the economy shrink?
One of the best analysis of this is actually on the Wonkblog (as usual):
A significant reason for the contraction is that the drop in defense spending. Other reasons are that companies simply ran down inventories (possibly in anticipation of a slowdown resulting from the fiscal cliff?) and a sharp decline in exports driven by a global slowdown.
Good news #1: The inventories part if probably a one time blip and will correct itself.
Good news #2: government spending is down. The defense spending reduction it is speculated can be attributed to two things:
- A natural pattern of defense spending where it always rises in Q3 and drops in Q4; and
- A preparation for the sequester, knowing that they cannot really cut spending on a dime.
This also continues a longer term trend in cuts in government spending as seen from this chart:
The Private sector has been growing at over 2% and possibly over 3%. If government spending had been flat, then the US economy's growth rate would have been north of 3%. However, between budget cuts agreed by Obama and state government cuts, there is a significant drag due to the public sector pull backs.
What this economic report underlines though is that if the sequester goes into effect, the US economy will be plunged into recession. Possibly a contraction of over 8%. Let me put that in perspective. That is a larger drop in US GDP than occurred in 2008-09. The fact is the costs have to be brought under control, but the question is whether causing a recession is the way to do it. Volcker's experiment in the 80s would suggest it may be OK. However, austerity experiments in UK and the EU in general call this into question.
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