Week in Review: Economists Mostly Optimistic While GDP Falls

Ben Litwin ’15

Earlier this week, it was announced that the fourth quarter of 2012 showed the first decline in the gross domestic product (GDP) since the United States began to recover from the recession in 2009.    In the end of last year, the GDP fell at an annual rate of 0.1 percent.  Now this isn’t a huge fall and basically just shows that the GDP remained constant, but it could be a sign of what is to come in the upcoming year.  Although the economy seems to be strong, there are a lot of challenges that the country will soon face that could lead to some major issues.

In an article in U.S. News written this week by Danielle Kurtzleben, it is noted that this decline in the GDP is due to significant spending cuts in national defense and a decrease in private companies’ inventories.  These two things both led to the decrease, but it was overemphasized by the simultaneous action.  In fact, Joel Naroff, the president and chief economist of Macroeconomic Advisors, and Justin Wolfers, a nonresident fellow at the Brookings Institutions, agree that this does not accurately show how the economy is currently behaving and that consumer spending is still strong.  According to an article written in The Daily Beast by Megan McArdle, “personal consumption spending and investment were humming along, growing 2.2% and 8.4%, respectively.”  With individuals increasing consumption and private industry increasing investment, the economy seems to be showing healthy numbers and therefore suggest that the third quarter of 2012, where the GDP grew at a 3.1 percent annual rate, is a better indicator.

However, the current positivity regarding the health of the economy could very well be premature. Although most economists agree that this latest decline is not something to worry about, we could be approaching many negative events.  Ethan Harris, co-head of global economics research at Bank of America Merrill Lynch, agreed in the New York Times this week that the drop in defense spending exaggerated the stunt in growth, but the higher payroll taxes that were put into effect at the start of the New Year could hurt the economy.  Along with these tax increases that the American people are just beginning to deal with, there are going to be more spending cuts to the federal budget in the next few months when sequestration is triggered on March 1, 2013 (or if Congress passes cuts to avoid this deadline). Either way, this will lead to less spending and therefore lower GDP numbers.  If this is combined with a drop in consumer spending due to higher taxes, we could face a second quarter of GDP contraction and consequently fall back into a recession.

Nevertheless, most economists remain optimistic. Michael Feroli, chief United States economist at JP Morgan, commented in the aforementioned New York Times article that he was surprised at these fourth quarter numbers since all the indicators pointed to a healthy economy.  One quarter of a decline in GDP is not scaring most economists, and there are very few, if any, who actually feel that another recession is around the corner for the United States.  The overwhelming consensus is that there were two significant phenomena which negatively affected the last quarter of 2012 – the decrease in both national defense spending and inventories – and most experts agree that the economy will continue to grow throughout 2013.