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Economy Contracts For 1st Time Since 2009 as Obama Cuts Military Spending

The recovery of the American economy stalled for the first time in three and a half years, with news of the dip in steady growth coming just a week after President Obama was inaugurated for a second term. But ironically, the decline was almost entirely due to a reduction in spending by the federal government — illustrating what happens when Republicans get their wish and the government spends less money.

The drop in the economy took economists and Wall Street by surprise, as the nation had grown accustomed to the gradual rebuilding of the country’s economic numbers. Steady growth had become such an accepted fact of life that Obama repeated it everywhere on his campaign trail, reminding voters that while the recovery was still not big enough, it was steady.

Preliminary government figures revealed that the economy contracted by 0.1 percent in the last quarter of 2012, which was the first contraction since the recession ended in 2009. The biggest drag on the economy was lower military spending, fewer exports and smaller business stockpiles. The 22.2 percent reduction in military spending was the largest since 1972.

Even though the contraction in the gross domestic product was caused by lower government spending, which Republicans have been demanding, it didn’t stop them from attacking the president.

“The bad GDP news makes it even more unbelievable that Obama has been ignoring job growth in his second term agenda,” Reince Priebus, chairman of the Republican National Committee, posted on Twitter.

White House spokesman Jay Carney was quick to point the finger in the other direction.

“Our economy is facing a major headwind, and that’s Republicans in Congress,” he said.

The overall numbers for the year are expected to show growth of 2.2 percent, according to The Wall Street Journal. But the silver lining in the GDP is that the contraction masked a relatively strong quarter of consumer spending, which increased at a 2.2 percent rate in the fourth quarter, up from 1.6 percent in the third.

“The mainstays of the domestic private economy — housing, consumer spending and business investment in equipment and software — were stronger,” according to The Journal.

Economists said the bad news in the report should not be taken too seriously.

“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 note to clients, according to published reports. “The drag from defense spending and inventories is a one-off. The rest of the report is all encouraging.”

The U.S. wasn’t alone in its fourth quarter contraction.

“The U.K., Germany, Spain and Belgium have said their economies shrank in the fourth quarter, and several more eurozone members in coming weeks are expected to report their own declines. Budget cuts appear to be a leading factor driving the contractions in many of those nations,” according to The Journal.

While there may be more bad news on the horizon — significant federal spending cuts are scheduled to take effect March 1, and most Americans are now paying higher payroll taxes with the expiration of a temporary cut in early January — economists expect to see positive growth in the jobs numbers released tomorrow.

 

 

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