Economy hits pothole, but likely to avoid ditch

News Analysis

(MoneyWatch) One takeaway from the sharp contraction in U.S. economic growth in the final three months of 2012: The sky isn't falling.

Although the headline number of 0.1 percent annualized growth for the period might sound alarming, the decline is attributable to temporary factors, economists said. And the Federal Reserve, while announcing its decision to leave interest rates unchanged Wednesday afternoon, blamed the slowdown on  "weather-related disruptions and temporary factors."

After surging in the August-to-September quarter, defense spending late last year plunged more than 22 percent, slicing 1.3 percent off overall GDP. Businesses also reduced their stockpiles, reducing growth by an additional 1.3 percent.

The upshot? Economic growth of 3.1 percent in the third quarter likely overstated the strength of the economy, while the latest data appears to understate it. Many experts predict that the economy will continue to idle in the early months of 2013 before picking up speed in the second half of the year.

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Investors seemed unfazed by the downturn, with stocks largely flat in early afternoon trade.

"It would be a mistake to view this drop in GDP -- driven by temporary corrections in defense spending and inventories -- as a possible harbinger of recession," said Nigel Gault, chief U.S. economist for IHS Global Insight, in a research note. "The incoming data points to continued growth, and we expect GDP growth to rebound to around 2 percent in the first quarter."

Capital Economics also characterized the downturn as a blip, describing it as "the best-looking contraction in GDP you'll ever see." The research firm notes that personal consumption and income grew at a healthy clip toward the end of the year. Business spending on software and other equipment, another key driver of the economy, also rose 8.4 percent. That suggests companies are planning for decent, if not outsized, growth.

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Economist Dean Baker of the Center for Economic and Policy Research points to another ray of light in the latest Commerce Department figures: Spending on health care in the U.S. -- the main reason, along with the housing bubble, that the federal deficit has risen in recent years -- is slowing. The amount of money people shell out on doctor's visits and other medical services is now growing less quickly than the rest of the economy. 

"It seems increasingly likely that we are on a slower health care cost trajectory," Baker said in a report, adding that this will shrink the deficit when federal budget staff incorporate the data into their forecasts.

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Not that the economy looks set to take off. A 2 percent hike in payroll taxes that kicked in on January 1 is likely to pare consumer spending in the first half of the year. The Conference Board, a trade association for businesses, said this week that slimmer paychecks are denting consumer confidence, which could curb spending and hinder the recovery.

Job growth also remains considerably weaker than normal following a recession. The economy added 192,000 jobs in January, according to a reading Wednesday of private-sector job-creation. Such growth won't do much to reduce unemployment from its current rate of 7.8 percent, but "it doesn't indicate that the economy is plunging headlong into another recession," said Paul Ashworth, chief U.S. economist for Capital Economics, in a research note.

The biggest unknown remains the outcome of congressional jockeying in Washington over mandated government spending cuts. That "sequester," the result of a 2011 compromise among Democrats in Republicans as part of a deal to raise the government's borrowing limit," could severely harm growth by removing more than $100 billion in federal spending quickly, beginning in March.

[eroteme2]

It is comforting to learn that the sky is not falling. But the last I heard was there is no sky, only space, so if there is no sky these experts are correct, the sky is not falling.

[fifthtenn]

Way to whitewash the news again. Christmas season was disappointing, tax rates went up January 1. You didn't mention these problems. Obamacare is looming on the horizon for small businesses. Come on, report both sides of an issue. The economy shrunk. Period.

[MiamiRealEstateKing]

Is there a way to coordinate stories? These two seem to contradict each other instead (see: http://www.cbsnews.com/8301-500395_162-57566615/economy-shrinks-0.1-in-q4/)

[wfw3536]

I am amazed how the Obama and the national media insist that we're doing great with the economy. When you're GDP does not grow that is a major red flag and tells you there is a good chance of another recession. Two quarters of zero grow and you have an offical recession. And the main reason why the GDP fell is the government didn't spend enough, as Obama racks up one plus trillion dollar deficits each year. Where is the articles about all of those shovel ready jobs Obama created with his 800 billion plus stimulus spending. And where are all of those economists who just before the election were telling us how great we were doing and how everything was great with the economy.

[zmonkee]

well...."those shovel ready jobs, weren't quite shovel ready".....

[tb91006]

This is just the beginning...it looks like sugar high is wearing out with Bernanke and his monthly QE.

[zmonkee]

hmmmm, job growth and consumer spending are both down-- I wonder if that has anything to do with obo raising taxes on the people who hire? and also raising taxes on EVERYONE's payroll tax, so people are taking home less money??
Who is left to blame on this? Bush? Arab Spring? FOX News? Rush? A video that was worse than Borat? All of the Above?

[mars7578]

Instead of the FED loaning billions to the large banks with little direction,it should be required to invest some of it in pensions and retirement funds in a way that would allow military and other workers 62 and older to retire now.This would add jobs and reduce the governmental workforce.This requires no Congressional approval,just for Fed ,Treasury or Adminstration work out the details so that it produces revenue.

[mjvwsr]

You have entered the twilight zone

[zmonkee]

funny how many articles are ahead of this one on the front page--

[brilliantone]

A president that believes in more government, more laws, more rules, more taxes and more spending will never lead this economy to robust growth. With the EPA, National Labor Relations Board, Department of Energy pushing out thousands of new rules and guidelines,and other new uncertainty like incredible costs of Obamacare for small businesses, possible new taxes to hurt everyone like the cap and trade intiatives Obama pursued in the first term,is it any wonder the economy is the worst following a recession in history. It is not suprising that CBS puts a editorial spin on this news with the headline "pothole--not a ditch", must have been part of the Pelosi talking points.

[RJknowstomuch]

They will be talking tonight about how this is why they need to tax and spend more. Every solution for a lib is to throw money at it.

[stopkillingourwilderness]

i know! i want to live in the gutter with chronic preventable disease in a completely poisonous dump where i earn $2/day unless my boss decides not to pay me, while the 1% trickle down all over me! why can't we have that??? north korea gets it, somalia gets it, why not us??

[brilliantone]

A president that believes in more government, more laws, more rules, more taxes and more spending will never lead this economy to robust growth. With the EPA, National Labor Relations Board, Department of Energy pushing out thousands of new rules and guidelines,and other new uncertainty like incredible costs of Obamacare for small businesses, possible new taxes to hurt everyone like the cap and trade intiatives Obama pursued in the first term,is it any wonder the economy is the worst following a recession in history.

[RJknowstomuch]

Well you know it was Bush's fault as well as Fox news. If they would stop pointing this stuff out the economy would do better.

[hypnotoad72]

Oh, please. Obama has believed more in GOP policies:

http://www.msnbc.msn.com/id/3096434/vp/40575006#40575006

http://www.foxnews.com/politics/2011/10/11/romneys-advisers-met-with-obama-to-help-craft-obama-care/

How long of a list would you like to ignore?

[zmonkee]

by "temporary"...do they mean until obo is out of office?

[hypnotoad72]

That depends. Obama being the one who's copied the GOP's antics, or the Obama people voted for who has stayed in the background up to this point?

See my other replies for more info and links to some sources you might want to view...

[zmonkee]

I mean the obo who spends like teenager at the mall with daddy's credit card!