(MoneyWatch) -- The nation's gross domestic product
-- the value of all goods and services produced -- fell at an annual
rate of 0.1 percent in the fourth quarter, a big downshift from 3.1
percent in the third quarter.
During the quarter federal spending
plummeted by 15 percent, led lower by the biggest cut in defense
spending in 40 years. The reduction in government spending, along with a
pullback in private business inventories, reduced growth by 2.6 percent
over the quarter.
There were some small positives within the
report: Consumer spending increased by 2.2 percent, up from 1.6 percent
in the third quarter and business spending was up 8.4 percent after
declining in the previous quarter. Growth for all of 2012 was 2.2
percent, ahead of 2011's growth of 1.8 percent.
Economists had predicted a weakened pace,
but few thought the economy would actually shrink after 13 consecutive
quarters of growth. Because this is the first of three readings on the
quarter, the number is subject to revisions, so maybe there will be an
Still, there's no getting around the fact that the U.S. is
still mired in a slow growth recovery. According to the Wall Street
Journal, the real rate of economic growth during the recovery has
averaged about 2.2 percent, which is about half the 4.23 percent average
rate in the past 10 recoveries and well below the average annualized
GDP since World War II of 3 - 3.5 percent.
worrisome is what lies ahead. The 15 percent reduction in government
spending may be a mere pittance when compared to the $110 billion of
across-the-board spending cuts ("sequestration") that are set to begin
on March 1. According to Macroeconomic Advisors, the sequester could
shave 0.7 percent points from 2013 GDP.
Those spending cuts come
on top of the 0.5 percent reduction of growth caused by the recent
payroll tax increase. Capital Economics attributed the recent drop in
the Conference Board's Consumer Confidence index
to a 14-month low to the payroll tax increase and predicts that
"household income is likely to restrain first-quarter consumption
growth." As a result of both the payroll tax increase and spending cuts,
most economists have downgraded growth expectations for the year.
instructive to note that the coming debate about the nation's debt and
deficit severely impact prospects for future growth. Before deficit
hawks extol the virtues of a country living within its means, it may be
wise to look at Spain's most recent report on economic growth.
The preliminary reading of Spanish GDP fell 0.7 percent in the fourth
quarter from the third quarter and 1.8 percent from the same period the
previous year, as new rounds of eurozone imposed austerity depressed the
economy. Is the U.S. ready to trade debt reduction for economic growth?