Economy Shrinks By A Shocking 0.1% in Last Quarter of 2012, And It's The Republicans' Fault


We finally have data, and it’s pretty clear: the GOP’s fiscal cliff brinkmanship hurt the economy.

America’s economy shrunk in the last months of 2012, against most economic predictions that growth and recovery would continue throughout the end of the year into 2013.

The largest defense cuts in 40 years (22%), lagging exports, and uncertainty regarding postponement of the much-dreaded cuts under sequestration if Congress failed to reach a deal combined for a toxic effect. The U.S. Commerce Department concluded that the economy contracted at an annual rate of 0.1% between October and December 2012 – the first such contraction since the second quarter of 2009.

The economy is still improving overall with 2.2% growth in the past year, opposed to 1.8% growth in 2011. Economists expected a slowdown from 3.1% growth in the third quarter of 2012, but virtually no one expected a negative number; instead, Wall Street consensus was that the economy would come in at approximately 1.1%.

“I’m a little surprised,” said Michael Feroli, chief United States economist at JPMorgan. “It grabs your attention when you have a negative number across everyone’s screens.”

Despite the grim numbers, some economists have been quick to point out the news is not as bad as it looks. The contraction was sharp and sudden, falling from 3.1% growth in the third quarter of the year, but it may also prove short-lived.                                                                                       

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

“While the inventory runoff and the steep decline in defense spending in the fourth quarter made economic activity look weaker than it really was, the underlying demand from consumers and businesses kept moving forward at a moderate pace,” said Kathy Bostjancic, a macroeconomic analyst at the Conference Board.

As Atlantic business editor Derek Thompson comments, personal consumption accelerated in the last quarter, as well as personal consumption of durable goods, equipment and software investment, and residential spending.

What's that tell us? Underlying economic fundamentals are still improving. What we see now is an artificially induced shock to growth – and it's political.

Thompson freely admits that the economy is merely “bouncing higher than a dropped dead cat,” and the private sector still appears reminiscent of “a recently crippled fellow in physical training.” But he accuses “the insane trainers at the Government Rehabilitation Center” of “[insisting] on complicating the recovery by throwing pointless obstacles at our guy,” such as damaging cuts to state aid, an artificially created fiscal crisis and debt ceiling battle, and the looming sequestration cuts. 

The biggest obstacle to economic recovery is now pretty obvious: Congressional Republicans.

White House spokesman Jay Carney unsurprisingly agrees with this assessment, saying in a press conference Wednesday that the threat of sequestration or default to force a debt deal was “political brinkmanship that results in one primary victim. That’s American taxpayers and the American middle class.”

He said Republicans had deliberately obstructed economic recovery to hurt the president and benefit wealthy donors. “[A solution] can't be we'll let sequester kick in because we insist tax loopholes remain in place for corporate jet-owners,” Carney continued

Republicans placed the blame on the White House for not accepting House GOP-proposed budgets that contained massive budget cuts to entitlement and discretionary spending.

“Twice the House has passed legislation to replace them with common sense cuts and reforms,” a spokesman for Speaker John Boehner (R-Ohio) said. “If there was any uncertainty late last year about the sequester, it was because the Democratic-controlled Senate, per usual, never lifted a finger to pass a plan to replace it.”

That’s Republican intransigence for you: double down. The budgets to which the spokesman is referring are all variations on Paul Ryan’s "Path to Prosperity," which was opposed in swing states by margins of roughly 10%.

So there you have it. The economy has been growing slowly, but steadily for years. Not fast enough, but certainly not shrinking. The only reasons we have for this sudden contraction are a constant state of political crisis and voracious demand for hazardous cuts fueled by the GOP.

Brad Woodhouse, Democratic National Committee chair, puts it even simpler. “GOP holds econ hostage over debt ceiling. Deal to avert crisis includes steep spending cuts they wanted. Economy slows. Blame Obama. #unreal,” he tweeted this morning.