By the Blouin News Business staff

The shocking political drag on U.S. growth

by in U.S..

Home of fiscal drag. Photo credit: AFP/Getty Images/Saul Loeb

There is no question that the advance estimate of U.S. GDP in the fourth quarter of last year was a shock. Continuing signs of recovery in consumer spending, business investment and the housing and labor marked had encouraged economists to expect modest growth for the quarter, a tad over 1%, not the 0.1% contraction reported. If confirmed by the revised final figures (by no means certain; the second estimate is due February 28) it would be the first contraction in the U.S. economy since 2009.

The finger of blame points directly at the fiscal cliff negotiations over tax rises and spending cuts that dominated Washington towards the end of 2012. Growth was dragged down by government spending cuts. Defense spending, down 22%, fell by the most in four decades. That was, to an extent, expected. What tipped the scales from modest economic expansion to contraction was that businesses brought to a halt the rapid rebuilding of inventories that had started over the summer as they saw the risks of the political debacle in Washington undermining business and consumer confidence.

That shaved an estimated 1.3% off the overall growth figure. A resumption of business inventory rebuilding should reverse that in the first quarter of this year. The underlying resilience in consumer spending and business investment that was seen in the fourth quarter should continue, too. GDP growth of 2% in the first quarter is likely. The gap between that and the contraction in the fourth-quarter is a measure of how damaging to the real economy is the political posturing in Washington.