Military cuts undermine Fed's push for growth
The economy contracted at an annual rate of 0.1 per cent in the final three months of 2012, the worst quarter since the last recession, hampered by the lower military spending, fewer exports and smaller business stockpiles, preliminary data indicated on Wednesday.
The Reserve, in a separate appraisal, said economic activity "paused in recent months".
Still, economists said the seemingly bleak gross domestic product report was not a sign another recession was looming. The data showed relatively strong spending by consumers and businesses, even as military spending posted its sharpest quarterly drop in 40 years.
Forecasters expect growth this year will rebound to 1.5 per cent, a little lower than the pace it has managed over the last three years.
"This is the tip of the iceberg on fiscal austerity from Washington," the co-head of global economics research at Bank of America Merrill Lynch, Ethan Harris, said. "It was exaggerated this quarter by the unusually large drop in defence spending but that and higher taxes will start hurting" in coming months.
The drop in exports stemmed in part from a fall in growth in Europe, where governments have also cut spending in a bid to balance budgets.
The parallel contractions are likely to provide fodder for economists who argue austerity efforts have gone too far in many developed economies.
The weak numbers could also force politicians to limit the cuts scheduled to take effect if Congress fails to produce a budget bargain in the coming weeks, and strengthen the argument that deficit reduction is a lesser concern than job creation.
The Reserve said it would continue its efforts to revive growth by holding short-term interest rates near zero and increasing its holdings of Treasury securities and mortgage-backed securities. a month. Those policies aim to reduce borrowing costs for businesses and consumers.
Frequently Asked Questions about this Article…
The preliminary data show the US economy contracted at an annual rate of 0.1% in the last three months of 2012. That slowdown was driven largely by sharp cuts in military spending, fewer exports and smaller business inventories, which together overwhelmed the Federal Reserve's efforts to boost growth.
Economists cited in the article said the weak GDP print was not a clear sign of another recession. Consumer and business spending remained relatively strong, and the Federal Reserve described activity as having 'paused' rather than plunged into a new recession.
Military spending posted its sharpest quarterly drop in 40 years, and that decline was a major contributor to the Q4 2012 contraction. Large cuts in defence outlays can directly reduce GDP because government spending is a component of overall economic output.
The article says the drop in exports partly reflected slower growth in Europe, where many governments were also cutting spending to balance budgets. Weaker demand from Europe reduced US exports and added to the drag on growth.
Forecasters expected growth to rebound to about 1.5% in the following year, a pace a little lower than the average growth seen over the prior three years.
Analysts quoted in the article warned fiscal austerity — exemplified by large defence cuts and potential tax increases — could start to weigh more heavily on growth in coming months. The weak numbers could also prompt policymakers to reconsider the depth of scheduled spending cuts.
The Fed said it would keep short-term interest rates near zero and increase its holdings of Treasury securities and mortgage-backed securities. These measures are intended to reduce borrowing costs for businesses and consumers and support economic activity.
Investors should keep an eye on several indicators mentioned in the article: consumer and business spending trends, defence spending developments, export data (especially demand from Europe), upcoming Congressional budget negotiations and Fed policy statements on interest rates and asset purchases.
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