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The Lessons of Today’s Troubling Report on GDP
This morning’s disappointing report that GDP actually declined by 0.1 percent in the fourth quarter of last year is a lesson in how government and serendipity can shape our economic path, especially in the short-term. The basic elements of economic prosperity are in place. To begin, Americans are spending again: Personal consumption accelerated from a 1.6 percent increase in the July-August-September quarter to 2.2 percent in October-November-December. Even better, spending on durable goods – autos, appliances, and so forth – increased at nearly a 14 percent rate. That should be no surprise, since disposable personal income rose at a strong and healthy 8.1 percent rate in the fourth quarter. Firms looking to the future are spending, too: Business investment expanded more than 8 percent, and investments in equipment and software were up more than 12 percent, a rate reminiscent of near-boom times. Housing is back as well, with residential investments growing at a rate of more than 15 percent.
How does all this good news translate into a flat quarter? For one thing, our exports fell faster than our imports. One reason for that was the economic slowdown in the huge European and Japanese markets. The other was Hurricane Sandy, which disrupted shipments in and out of the huge, New York and New Jersey ports. The hurricane also disrupted inventory purchases, which slowed by two-thirds compared to the preceding quarter. But the biggest single drag on the economy was Washington: Federal spending fell 15 percent, led by defense which declined at the fastest quarterly rate, 22 percent, in 40 years. Those declines were fueled entirely by politics, especially planning for the spending sequesters threatened for January 1.
We cannot influence the weather, but we can control the impact of government on the economy. This report should remind us that the economy remains vulnerable to precipitous, additional budgetary austerity. And given the progress we’ve already made on deficits -- $1.2 trillion in cuts over 10 years enacted in 2011 and $700 billion in new revenues enacted late last year – we can now proceed in a very measured way with the final stage of long-term reforms for entitlements and defense, plus some additional revenues. And to assure everyone that grown-ups who understand the economy are in charge again in Washington, Congress should cancel the sequesters and enact a clean, long-term increase in the debt limit.