The United States Department of Commerce reported Wednesday morning that the U.S. economy experienced negative growth of 0.1 percent from October through December, the first contraction since 2009. The fourth-quarter results followed 3.1 percent growth in the third-quarter.
Government spending cuts, fewer exports and fewer factory orders (resulting in slower inventory growth) reduced the gross domestic product by 2.6 percentage points. The spending cuts included a 22.2 percent reduction in defense spending, the largest cut in four decades.
When combined with a Bloomberg report on Tuesday that consumer confidence is at its lowest level in years, the sharp decline in GDP growth fuels concern that 2013 will strain an already anemic recovery. Add to that the automatic spending cuts, known as sequester, in domestic and defense spending set to begin in March if Congress fails to reach a deal to avert them and warnings from some economists that the U.S. is in danger of slipping into another recession becomes more legitimate.
The fact that many of our trading partners are in recession means exports will continue to lag into the summer. Exports fell by the most in nearly four years (0.25), a result of Europe’s recession and slower growth in China and some other large developing countries.
Without an increase in exports GDP growth will have to be driven by a combination of consumer and government spending and, when considering the consumer confidence level and the nearly $17 trillion national debt, that doesn’t seem likely.
Job creation remains weak, averaging about 150,000 jobs a month for the last 24 months. That pace barely keeps up with the new workers entering the labor force each year, and has done little to reduce the unemployment rate-currently 7.8 percent. Economists forecast that unemployment stayed at the still-high rate again this month. The government releases the January jobs report Friday.
Another question that remains to be answered is how will consumers react to the Social Security tax break expiring? The tax increase will lower take home pay this year by about 2 percent. That means a household earning $50,000 a year will have about $1,000 less to spend. A household with two high-paid workers will have up to $4,500 less.
There are economists that believe the underlying performance of the economy is reasonably strong, and that the contraction was caused by one-time factors that are not likely to repeat themselves. They point to the fact that personal consumption expenditures rose at a 2.2 percent annual rate, business spending on equipment and software rose 12.4 percent, and housing was solid. Residential investment rose at a 15.4 percent annual rate, the seventh straight quarter of expansion. Consumer spending, which is the largest driver of the economy, increased at a 2.2 percent annual rate.
The economy expanded 2.2 percent overall in 2012, improving on 2011’s growth of 1.8 percent. The 2.2 percent actual growth rate is less than half of what President Barack Obama projected (4.6 percent) in 2009. Then in 2010 his projection was lowered to 4.3 percent. And then in 2011 the White House dropped their forecast to 3.6 percent- still far from the actual result.
Without an increase in jobs it seems unlikely that our economy will be durable enough to maintain the tepid GDP growth we have seen over the last three years. With the deficit already out of control can the government spend more to prop up the economy? Don’t forget that the Fed is infusing $85 billion a month into the economy, and will continue to do so until the unemployment rate drops below 6.5 percent. That’s already a nearly $1 trillion a year open-ended commitment.
U.S. National Debt Clock
While Obama spent much of the campaign talking about the importance of job creation, he last met with his jobs council on January 17, 2012. While jobs (or the lack of) were a worthy topic of discussion during the campaign, it would seem Obama’s interest in job creation faded after he kept his.
Rosy projections from the Obama administration as to the future of the economic recovery have become common place over the last few years and will no doubt be forthcoming from the White House as to the year ahead, but remember-this is the same team that went on tour summer of 2010 to declare it ‘Recovery Summer’.
It is interesting to note that the Gallup U.S. Job Creation Index was at the highest point (23) it had reached since June of 2008 (23) the week ending on election day- since then the index dropped as low as 13 (over a 40 percent drop) the week ending November 25, and was 16 (over 30 percent drop) for the most recent week. Seems the jobs creation outlook has declined since President Obama’s reelection.
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