The economy shrank in the fourth quarter of 2012, indicating that growth remains a problem. The woes made the New York Times front page on Thursday, "Growth Halted In 4th Quarter Despite the Fed [1]," though the story by Nelson Schwartz and Binyamin Appelbaum was not prominently featured (and Obama wasn't mentioned until paragraph 12, in a quote from Reince Priebus, chairman of the Republican National Committee). The Washington Post made it the lead story under the headline "GDP shrank at end of 2012."
The federal government helped bring the economic recovery to a virtual halt late last year as cuts in military spending and other factors overwhelmed the Federal Reserve’s expanded campaign to stimulate growth.
Disappointing data released Wednesday underscore how tighter fiscal policy may continue to weigh on growth in the future as government spending, which increased steadily in recent decades and expanded hugely during the recession, plays a diminished role in the United States economy.
Significant federal spending cuts are scheduled to take effect March 1, and most Americans are also now paying higher payroll taxes with the expiration of a temporary cut in early January.
The economy contracted at an annual rate of 0.1 percent in the last three months of 2012, the worst quarter since the economy crawled out of the last recession, hampered by the lower military spending, fewer exports and smaller business stockpiles, preliminary government figures indicated on Wednesday. The Fed, in a separate appraisal, said economic activity “paused in recent months.”
The jump headline on A3 clarified that reduced government spending cuts was the culprit: "Economic Growth Halted in 4th Quarter on U.S. Cuts." A photo caption also laid the blame on the 22.2% drop in military spending.
Though one might assume that conservative Republicans, who are out of power, would get any political benefit from the bad news, the Times saw it as another nudge for big-spending Keynesian liberalism, as if the economic stimulus and $16 trillion dollar debt wasn't sufficient "pump priming."
The drop in American exports stemmed in part from a decline in economic growth in Europe, where governments have also been cutting spending in a bid to balance budgets. The parallel contractions are likely to provide fodder for economists who argue that austerity efforts have gone too far in many developed economies.
The surprisingly weak numbers could also force politicians to limit the cuts that are scheduled to take effect if Congress fails to produce a budget bargain in the coming weeks and strengthen the argument that deficit reduction is a lesser concern than job creation.
“Our economy is facing a major headwind, and that’s Republicans in Congress,” said the White House spokesman Jay Carney.
Republicans said the White House was not advancing concrete plans for creating new jobs and stimulating the economy.
The Times concluded with the pro-spending spin.
If it were not for the drop in total government spending, the economy would have expanded at an annual rate of 1.2 percent in the fourth quarter, said Nigel Gault, chief United States economist at IHS Global Insight.
....
In the long term, government’s share of economic output “is a question of values and choices and what size you think the government should be,” Mr. Gault said. But in the short term, he said, steep cutbacks make for risky economic policy.
“We’re being more austere than we need to be,” he said. “The economy isn’t growing that fast and you don’t want to be taking away stimulus now.”