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U.S. economy surprises experts and shrinks 0.1%

In this Wed. Dec. 5 2012 phocontainers are unloaded from cargo ships  Port Los Angeles. Most economists agree thsnapshot

In this Wed. Dec. 5, 2012, photo, containers are unloaded from cargo ships at the Port of Los Angeles. Most economists agree that the snapshot of U.S. economic growth released Wednesday, Jan. 30, 2012, is going to look dismal. (AP Photo/Nick Ut)

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Updated: March 2, 2013 7:39AM



The best news from the latest reading on the nation’s economy is that nothing changed. The worst news is that the “headline” number in the report on gross domestic product looked really bad.

It said the nation’s economy contracted in the fourth quarter of 2012, the first time that has happened for any period since 2009, when the U.S. was in full-bore recession.

The Commerce Department said Wednesday that the economy shrank at an annual rate of 0.1 percent for the period from October through December, compared with 3.1 percent annual growth for the previous quarter. That normally would be enough to set off alarms from Wall Street to every political blog, except that special circumstances applied.

The decline was due mostly to an unanticipated slowdown in federal defense spending. Analysts said some of that may have stemmed from budgetary gamesmanship to keep the government from bumping against its debt ceiling before the November election. Other declines could be attributed to a winding down of troop commitments in Iran and Afghanistan.

“Frankly, this is the best-looking contraction in U.S. GDP you’ll ever see,” Paul Ashworth, an economist at Capital Economics, said in a research note. “The drag from defense spending and inventories is a one-off. The rest of the report is all encouraging.”

The stock market spent most of Wednesday sorting out its reaction. The Dow Jones industrial average fell 44 points to 13,910.42. Lifting spirits was a report from private payroll firm ADP that said companies added 192,000 jobs in January, the most since February 2012.

But the falloff in defense spending, 22.2 percent compared with 2012’s third quarter, struck many insiders unawares. “I’m still trying to get my head around this,” confessed Carl Tannenbaum, chief economist at Northern Trust Corp.

The rest of the economy functioned quite satisfactorily. Consumer spending rose 2.2 percent and business investment jumped 8.4 percent after being down over last summer.

The danger was that the decline in spending on defense could become part of a pattern that will inhibit growth, eventually causing consumers to shut down and intensify fears of job losses. Those are classic ingredients of a recession.

The surprised economists said the GDP number was dragged down by onetime factors. “We’ll have a little bit of a bounce back coming up,” said Tannenbaum, referring to the government spending and a drawdown in business inventories that analysts said was mostly agricultural related.

Economists at Mesirow Financial summed things up in a note that read, “Last summer’s drought will no longer be a drag on inventories, while damages created by [Hurricane] Sandy are beginning to be repaired. The economy is not exactly chugging along.”

It’s also been described, more poetically, as a “plow horse economy.” The image of slow and steady progress will give comfort to some, but the GDP report also contains a warning about the influence of government spending.

Congressional Republicans are demanding deep cuts for the Pentagon and in domestic programs if Democrats don’t make concessions in spending. Also, a two percentage-point increase in Social Security withholding taxes was enshrined in the Jan. 1 budget deal that averted the “fiscal cliff.”

Companies involved in defense said the reduced spending came as no surprise. Chicago-based Boeing Co. has been preparing for Pentagon cutbacks over the last year or two and has compensated by building up business with other nations, said spokesman John Dern.

He said that international customers accounted for 24 percent of revenue in Boeing’s defense businesses during 2012, with order backlogs reaching 41 percent of the total. Both figures are sharply higher than the company recorded in prior years.

The Aerospace Industries Association, representing such companies as Northrop Grumman Corp., said the GDP report shows the stark threat to the economy from further cuts in defense.

“In July 2011, Congress enacted a cut of $487 billion to the defense budget, resulting in ongoing, significant job losses in the defense sector,’ said the association’s president, Marion Blakey. The continued standoff in Washington over the budget would trigger indiscrimate cuts in defense that threaten the economy and national security, she said.



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