Wednesday's 0.1% contraction in GDP marks the largest decline the recovering U.S. economy has seen since October 2009. While any contraction in the economy is cause for concern, high employment and housing numbers seem to mitigate the blow caused by this drop. Fourth quarter GDP appears to be a fluke and not a warning of coming recession.
Third quarter GDP grew by 3.1% and analysts predicted that we would see a 1% increase in Q4, a 0.1% decline was sharp and unexpected. So what caused the U.S. economy to turn negative for the first time since the Great Recession?
Heidi Moore, U.S. finance and economics editor for The Guardian, assigns blame to 2012’s fiscal cliff crisis.
“It is completely evident that fears over the fiscal cliff and what is going to be called sequestration cuts is what caused GDP to shrink by such a huge amount,” Moore tells the Daily Ticker.
Moore points to cuts to defense spending as evidence of the fiscal cliff’s impact on GDP. The Pentagon decreased its expenditures by over 22% in the quarter ending in December. Had military spending remained the same, Q4 GDP would have increased by 1.27%. The decrease in defense spending was largely in preparation of the $500 billion cut to military disbursement that the fiscal cliff proposed.
“There was no other kind of pressure on defense spending that would have cause it to plummet 22% except for the expectation of the cuts,” says Moore.
Business pull back in response to fiscal cliff uncertainties was the second main cause of economic decline. According to the Bureau of Economic Analysis, “The downturn in real GDP in the fourth quarter primarily reflected downturns in private inventory investment.” Had private inventory investment remained at quarter three levels, GDP would have grown by 1.17% last quarter.
Moore contends that inventories were not low because of high consumption but rather because businesses purposely pulled back in inventory accumulation as a response to fiscal cliff threats.
“You saw a weak sales season,” explains Moore. “If you’d seen a really strong Christmas sales season then you’d say ‘fine, the economy is great’ but you saw it weak. What we know is that business leaders are the ones that have been afraid of the fiscal cliff, it hasn’t been consumers, business leaders are the ones who are going to say I’m going to stock my store up or not stock my store up.”
There is some good news to be found in all of this: sequestration cuts, currently scheduled to take hold March 1st, won’t further shrink the U.S. economy.
“We’re used to what sequestration might look like and feel like so it might not be as much as a hit,” assures Moore. “We’ve seen so many other signs of a recovery that it might not hit us as hard.”
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