The Economy Goes Negative

Q4 GDP was -0.1%. Dylan Matthews breaks down the decline:


Plumer looks at the causes of the economic contraction. The big one:

Government defense expenditures plunged by a staggering 22.2 percent between October and December. According to the Bureau of Economic Analysis, the Pentagon spent significantly less on just about everything except military pay. Had the Pentagon not cut back on spending, the economy would have grown at a weak but positive 1.27 percent pace.

Neil Irwin says this was “a bad quarter for the U.S. economy, but not nearly as bad as the overall negative number would suggest”:

A drop in business inventories was the second major drag on growth. Firms drew down their inventories by more than $40 billion, which subtracted 1.25 percentage points from GDP growth. With companies focusing on selling goods already sitting on their store shelves and in their warehouses, production in the nation’s farms and factories was not as high as one might expect given consumer and business spending. But businesses can’t simply run down their inventories forever, and that bodes well for future growth. Final sales, which add inventories back in, rose at a 1.15 percent rate.

John Cassidy points out another factor:

The final reason for the shocking G.D.P. figure was a sharp fall in American exports, sufficient to knock nearly one per cent off the growth figure. This was the first drop in exports since the first quarter of 2009. If sustained, it would be very worrying—indeed, it would raise the spectre of another global recession. But the world economy doesn’t look that bad. Europe and Japan are still in poor shape, but growth in China and other developing countries appears to be picking up. The latest forecast from the International Monetary Fund is that the world G.D.P. will expand a bit faster this year than last year (3.5 per cent compared to 3.2 per cent). Even if global growth merely holds up at last year’s levels, U.S. exports should pick up a bit.

Drum wishes the report “persuaded some people that government spending really does affect economic growth”:

Unfortunately, the kind of people who refuse to believe this seem to have a weird, walled-off section in the brains that makes an exception for military expenditures. Higher spending on bombs and aircraft carriers is good for the economy, but higher spending on bridges and electrical grids merely saps business from the private sector. I don’t know if the anti-Keynesians really believe this or are only pretending to believe it, but it works out the same either way. A report like this won’t change their peculiar views one whit.

Chait worries that we will see more reports like this one:

The budget “sequestration” will lop more than a trillion dollars of spending cuts out of the economy, creating similar effects as we saw this last quarter. The Obama administration had hoped the threat of these cuts, half of which come out of defense, would force Republicans to compromise on some kind of long-term deal that would eliminate all the short-term austerity and replace it with gradual, long-term deficit reduction. But that seems unlikely to happen.

Calculated Risk bets that America won’t enter a new recession:

The key story is that residential investment is continuing to increase, and I expect this to continue. Since RI is the best leading indicator for the economy, this suggests no recession this year or in 2014 (with the usual caveats about Europe and policy errors in the US).

Avent’s similiar verdict:

All in all, the fourth quarter performance is more warning shot than recession indicator. Underlying growth is positive but vulnerable to disruptions from abroad or from Washington. Now is no time for careless policy.