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. Those policies aim to reduce borrowing costs for businesses and consumers.
Frequently Asked Questions about this Article…
The article says the US recovery stalled as cuts in military spending, fewer exports and smaller business stockpiles outweighed the Federal Reserve's stimulus. Preliminary data showed the economy contracted at an annual rate of 0.1% in the final three months of 2012, with the sharp drop in defence spending highlighted as a key driver.
A 0.1% annualised decline means growth cooled in that quarter, but economists quoted in the article did not see it as evidence of a new recession. Consumer and business spending remained relatively strong, so investors should view the number as a warning sign about fiscal headwinds rather than a definitive market crash signal.
The article notes defence spending posted its sharpest quarterly drop in 40 years, which directly affects companies tied to military contracts and can weigh on broader growth. For investors, reduced defence outlays can mean pressure on defence-sector earnings and contribute to slower overall GDP growth.
According to the article, the Federal Reserve planned to keep short-term interest rates near zero and increase its holdings of Treasury securities and mortgage-backed securities. Those policies are intended to lower borrowing costs for businesses and consumers, which can support economic activity and influence bond and interest-rate-sensitive asset prices.
The article explains the drop in exports was partly caused by slower growth and spending cuts in Europe. Simultaneous contractions abroad and at home can amplify the slowdown, making export-dependent sectors and multinational companies more vulnerable.
The article relays concerns from economists that fiscal austerity — including military cuts and higher taxes — could weigh on growth. One forecaster quoted expected a rebound to about 1.5% growth for the year, suggesting austerity is a real risk but not an immediate signal of recession; investors should monitor policy changes closely.
The article says weak numbers could push politicians to limit planned spending cuts if Congress fails to reach a budget deal. That means decisions in Washington about budget bargains and deficit reduction versus job creation could materially affect growth expectations and market sentiment.
The article indicates Fed actions aim to reduce borrowing costs by buying Treasuries and mortgage-backed securities, which tends to support bond markets and interest-rate-sensitive sectors such as housing. At the same time, defence-related equities could face pressure from military spending cuts, while consumer- and business-spending resilience may help other parts of the stock market.
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