Economists were shocked Wednesday when the Commerce Department reported that the economy shrank in the final three months of 2012. The dip was slight — just 0.1 percent — but experts were expecting at least a bit of gross domestic product growth after an encouraging third quarter. The fall was largely caused by a sharp drop in government spending and cautious cutbacks companies made to their inventories. The impact of the news "is ambiguous in terms of the economics," says Glenn Thrush at Politico, as it's not being touted as a sign that we're doomed to a double-dip recession. Still, says Thrush, "the politics are unambiguously terrible for Barack Obama." Team Obama started 2013 on offense, gaining momentum on immigration, guns, and more. "Wednesday's bad number forces them into a defensive crouch" again.
The bad news for Obama was an interruption in the we're-finally-roaring-back narrative — it was the worst GDP hit since the depths of the '09 near-depression — and it gave an adrenal jolt to the a GOP messaging establishment left supine by the Mitt Romney mirage and recent soul-searchy infighting. [Politico]
Actually, Obama's supporters say, the slight backtracking should strengthen Obama's hand in the looming battle with Republicans over reducing spending even further. Robert Borosage of the liberal Campaign for America's Future tells The Huffington Post that the economy would have done better in the fourth quarter if Republicans hadn't been threatening to refuse to raise the debt ceiling, potentially leaving the government unable to pay its bills, and digging in over the fiscal cliff, which nearly knee-capped the economy with deep automatic spending cuts at the start of 2013.
As Europe has shown and the IMF has warned, inflicting austerity on a weak economy is ruinous and is likely to drive us back into a recession. Those dismissing the downturn as due to an odd drop in government spending should consider that more of these are on the docket. [Huffington Post]
It's no surprise that Obama's fans are using the contraction "to call for more "stimulus," says The Wall Street Journal in an editorial. These devotees of Keynesian economics equate "higher government spending with growth, no matter how wasteful the spending." The fact that the economy is inching backward toward another possible recession only demonstrates that "the spending blitz of 2009-2010" was bound to end badly, even if it did offer a brief bump in GDP.
The real story is that the Keynesians promised that the stimulus would kick-start the economy to a higher growth plane. It hasn't. Growth has sputtered in each of the last three years, and for all of 2012 was only 2.2 percent. That's barely above 1.8 percent in 2011, which was below 2.4 percent in 2010. The biggest loser in all of this should be the notion that temporary bursts of government spending can produce durable economic expansions. [Wall Street Journal]