GDP contracts in 4Q due to not enough government spending

Posted by AzBlueMeanie:

So the headline on all of the economics and business pages today is U.S. economy unexpectedly shrank in 4Q. Oh noes! The caption editors really ought to read further before causing a panic with their unnecessarily dire captions.

Wednesday afternoon, after completing their first policy meeting of
the year, Federal Reserve leaders signaled that they saw the decline not
as indicative of some bigger downturn in the economy. Evidence since
their December meeting “suggests that growth in economic activity paused
in recent months, in large part because of weather-related disruptions
and other transitory factors,” [e.g., fiscal cliff negotiations] the Federal Open Market Committee, the
central bank’s policymaking group, said in a statement. The officials
left their current policies in place, maintaining near-zero interest
rates and a program of buying $85 billion in securities each month.

Gross domestic product fell at a 0.1 percent annual rate in the
fourth quarter, the Commerce Department said Wednesday, far below the
1.1 percent gain that analysts had forecast. The number will be revised
extensively in the months ahead as more complete data becomes available
,
but if the number stays in negative territory, it would be the first
contraction for the U.S. economy since the second quarter of 2009.

The good news is that the biggest factors in the decline aren’t
expected to repeat themselves
. Underlying growth in consumer and
businesses spending was reasonably strong: Personal consumption
expenditures rose at a 2.2 percent annual rate, while business spending
on equipment and software rose at a gangbuster 12.4 percent rate.
Housing continued a bull run, with residential investment rising at a
15.4 percent annual rate for its seventh straight quarter of expansion.
(Click here for a full rundown of how much different sectors added to–or subtracted from–GDP)

It was, said J.P. Morgan Chase economist Michael Feroli in a report,
a disconcerting headline number which masked better underlying
performance of the economy
.”

So what caused the quarterly downturn in GDP? Why defense spending plunged 22% last quarter — and killed GDP:

Government defense expenditures plunged by a staggering 22.2 percent
between October and December. According to the Bureau of Economic
Analysis, the Pentagon spent significantly less
on just about everything except military pay. Had the Pentagon not cut
back on spending, the economy would have grown at a weak but positive
1.27 percent pace
.

* * *

Part of that is due to the fact that defense spending is shrinking
overall, thanks to budget pressures and the drawdowns in Iraq and
Afghanistan.

Another possibility,
as Michael O’Hanlon of Brookings told me, is that the Pentagon has been
preparing for the sequester budget cuts that had originally been
scheduled for January
. (They’ve since been pushed back until March.) The
Defense Department was facing the prospect of losing money that had
already been budgeted over multiple years but hadn’t been spent. That
led to a big spending spree in the third quarter, which was followed,
inevitably, by a drought in outlays in the October through December.

In any case, this episode does show that a sharp contraction in
government spending can have a powerful effect on GDP
. The slightly
encouraging news, however, is that many analysts expect this to be a
one-time blip. Paul Ashworth, an analyst with Capital Economics called
this GDP report “The best-looking contraction in US GDP you’ll ever see” in an e-mail release.

Here is The only chart you need on the GDP report:

Spending and investment are still looking good, but sharp contractions in business inventory and federal defense spending sunk the overall number. Paul Ashworth at Capital Economics called it “The best-looking contraction in U.S. GDP you’ll ever see.”

Judge for yourself. Here’s what the report looks like, if you break it down by its components.

GDP4Q

The GOP's alleged boy genius, Ayn Rand fanboy Rep. Paul Ryan, has been telling everyone who will listen that the "sequester" plan that he voted for which would make drastic cuts to government spending on non-entitlement programs and to the Pentagon budget "are going to happen." You can see what will happen in the results above.

Rep. Ryan and his Tea-Publican economic terrorists are threatening to blow up a modest economic recovery with their conservative austerity economics and send the country back into another recession (defined as three quarters of GDP contraction) with rising unemployment.

As Ezra Klein reminds us, the real problem is Government is hurting the economy — by spending too little:

Typically, when people say the government is hurting the recovery,
they mean that deficits are too high and uncertainty over future policy
is scaring businesses. But there’s little evidence of that.

The main reason to worry about deficits is that they’ll hike interest
rates, as government borrowing crowds out private borrowing, and that
makes it harder for businesses to grow and individuals to invest. But
interest rates are about as low as they’ve ever been.
After accounting
for inflation, the federal government has been able to borrow at an
unprecedented negative inflation-adjusted rate — so, the market is,
essentially, paying us to keep their money safe — since 2011
.

There is no empirical evidence that deficits are hurting the economy right now. The real problem is slow job growth, i.e., putting people back to work and erasing the deficit through more employed people paying taxes.

Nor is there strong evidence that businesses are holding back on
investment for any reason save lack of demand
. The general factoid you
hear in support of this argument is that corporations are sitting on
more than $2.5 trillion in cash, with the implication being that they’d
be spending that cash if not for the paralyzing effects of federal
policy.

But the build-up of cash reserves — or, to be more technical (and
more accurate), “liquid assets” — is a long-term trend that hasn’t
accelerated since the recession. The Federal Reserve keeps data on
liquid assets held by non-financial corporations, and the build-up was
faster from 1997 to 2000 than it was from 2008 to 2011. Why corporations
are holding so much more cash is an interesting mystery, but it’s not
one that began with the passage of Obamacare.

That said, the government is hurting the recovery, and badly. But
it’s not because it’s spending too much, or because of concerns over
future policy. It’s because government, at all levels, is spending and
investing too little.
Despite the stimulus and various other policies
we’ve passed to help the recovery, and despite the large deficits the
government has been running, government spending and investment have, at
all levels, been contractionary since 2010.

The new numbers the Bureau of Economic Analysis released on
fourth-quarter economic growth have received considerable attention for
the clear damage that falling government spending did to the economy.
According to the BEA, “government consumption expenditures and gross
investment” knocked 1.33 percentage points off the total change in
economic growth. If government spending had just been neutral — that is
to say, if it had neither contracted nor expanded — the economy would
have grown by 1.23 percentage points rather than shrunk by 0.1
percentage points.

* * *

Mark Zandi of Moody’s Analytics projects the sequester alone will cut
0.5 percentage points off growth in 2013 if it’s allowed to go into
effect.
Add that to the expiration of the payroll tax cut and assorted
other belt-tightening measures at the federal level and total fiscal
drag, he says, is likely to be more than one percentage point of GDP in
2013
— a significant hit when total GDP growth isn’t expected to be
above three percentage points.

* * *

So yes, the government is hurting the recovery. But it’s not because of
deficits or uncertainty, or at least, it’s hard to find evidence for
either theory. The real, provable damage the government has done to
economic growth in recent years has been in cutting back on spending and
investment since 2010.

Remember the old TV commercial that said "When E.F. Hutton talks, people listen"? Well, when conservatives talk about economics and government spending you should do just the opposite and not listen. These clowns don't know what the hell they are talking about and they are jeopardizing an economic recovery and job growth.

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