But those gains were overshadowed by the massive decline in government spending, especially in defense. The result was a 0.1 percent annualized dip in the nation’s gross domestic product. The report highlighted the contrast between what appears to be a slowly healing private sector and a public sector still buffeted by budget cuts.
The economy was “being pulled in opposite directions . . . and ending up going nowhere,” said Richard Moody, chief economist at Regions Financial Corp.
The biggest threat to the recovery now appears to be Washington, with lawmakers gearing up for another round of debates over spending cuts and raising the nation’s debt ceiling. Wednesday’s GDP report served only to harden the battle lines between Republicans who believe significant spending cuts are necessary to balance the federal budget over the next decade and Democrats who argue they will stunt growth.
“Do we make progress in a balanced way on our deficits? Or do we, you know, inflict harm on our economy here in Washington at a time when our economy is actually showing very positive signs?” White House press secretary Jay Carney said in a daily news briefing Wednesday.
But Sen. John Cornyn (Tex.), the No. 2 Republican in the Senate, called the idea that economic growth relies on government spending “a Keynesian pipe dream.” The best thing Washington can do for the economy is to rein in the deficit, GOP leaders said.
“Only the private sector can lead a robust, sustained recovery,” said William Allison, spokesman for House Budget Committee Chairman Paul Ryan (R-Wis.). “Government can never take its place.”
Fourth-quarter economic activity was far below the 1.1 percent annual growth rate economists had predicted. Exports fell at a rate of 5.7 percent in the fourth quarter, reflecting the slowdown in Europe. Businesses also drew down their inventories after unusually high stockpiling in the previous period. That reduced economic growth by 1.27 percentage points.
But perhaps the biggest surprise was the size of the drop in federal spending: 15 percent at an annual rate during the fourth quarter. Defense spending suffered an even bigger decline, dragging down growth by 1.3 percentage points. Many agencies began adopting contingency plans, instituted hiring freezes and delayed projects in anticipation of widespread budget cuts — all of which depress spending.
Still, economists said the decline looks especially dramatic because government spending had jumped more than usual in the previous quarter. That may have been a reflection of government agencies and private contractors shifting spending earlier in the year in anticipation of budget cuts, boosting third-quarter growth at the expense of the fourth. Economists are hopeful that federal and defense spending will return to more normal levels over the next few months, provided Washington can reach a deal on budget cuts and the deficit.