Monday, February 4, 2013

Why the GDP numbers may not be as bad as they seem.

      Recently, it was announced that in the forth quarter of 2012, the economy of the United States shrank by .1%, compared to a gain of 3.1% in the third quarter. This surprised economists, who expected growth of 1%. Although people may think this is the start of a new recession, it is more likely a one time phenomenon. 

      Two factors thought responsible for negative economic growth are cuts in government spending and slow inventory growth for business. In fact, if those factors were eliminated, the economy would have grown at a rate of roughly 2.6%.  Many statistics related to spending and saving have improved. Consumer spending and the savings rate grew from the previous quarter, by 2.2% and  4.7% respectively. According to Andrew Wilkson, who is the chief economic strategist at Miller Tabak in the state of New York "Consumption rose by 1.5 percent and was higher than 1.1 percent in (the) previous quarter." Another reason the number isn't as bad as it seems is housing. Residential construction increased by 15.3% and for the first time in nearly eight years housing added to the nation's GDP. Also hurricane Sandy had negative effects on GDP. 

         However not all of the news is good. Defense spending fell by 22%, which was a significant factor in the GDP shrinking. Spending for defense fell because of fears about the fiscal cliff and defense cuts. Since Washington didn't solve the sequestration or the debt problem, it is likely that Defense spending could remain weak for some time, and hurt the economy. Another reason the economy fell was the increase in the payroll tax. This shows that the spending cuts and tax increases required to solve the debt problem will have a major negative effect on the economy. This doesn't mean that the U.S. government shouldn't address the deficit, but it means that the longer it kicks the can down the rode, the more drastic the changes will be made to correct the problem, and these changes will be more harmful to the economy. 



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