Why No One Cares The Economy Shrank In the Fourth Quarter

The fourth quarter GDP report came out with a bit of a surprise: the economy shrank by .1%. The funny thing is, no one seems to be alarmed, or even care. Believe it or not, the report was actually pretty rosy. The overall economy is doing much better than most people realize, or partisans are willing to admit. So why the decrease? Daniel Gross reports for The Daily Beast:

But the real culprit this time was the federal government. We’ve noted this time and again, but it bears reporting. We are having a conservative recovery. Federal government spending may be up, on health care, entitlements, and benefits. But pretty much everywhere else in the vast government sector, spending is down – especially on employment. Since May 2010, some 1.072 million public-sector jobs have been cut.

Austerity, it turns out, detracts from growth. In the fourth quarter, declining state and local government spending reduced GDP by 8 basis points. But the real drag on growth in the fourth quarter was the federal government, and especially the Pentagon. Defense spending plunged 22.2 percent, subtracting 1.28 percentage points from the growth rate.

CNN Money confirms that reduced government spending sank otherwise good numbers.

It’s “the best-looking contraction in U.S. GDP you’ll ever see,” Paul Ashworth, chief U.S. economist for 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.”

A large cut in federal spending, primarily on defense, was one of the biggest drags on growth. Defense spending contracted at a 22% annual rate.

This should also serve as a warning to those who’d see the deficit and debt reduced too quickly. Whether we like it or not, government spending affects the economy. Irresponsibly reducing government spending can really hurt the economy which, to a certain extent, relies on government contracts for revenue.

Cutting government spending is tricky business. Lets hope our elected officials get it right. I’m hopeful they can; remember, even Paul Ryan’s budget doesn’t balance until 2040.

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2 Responses to Why No One Cares The Economy Shrank In the Fourth Quarter

  1. Pingback: Is The Deficit Shrinking Too Quickly? Continued | Reason and Politics

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