Unprecedented spending cuts and the first government shutdown in nearly two decades significantly slowed economic growth at the end of 2013 even as the private sector proved surprisingly resilient, according to data released Thursday.
The Commerce Department reported that the nation’s gross domestic product grew at a solid 3.2 percent annual rate during the fourth quarter. Strong consumer spending, investments by businesses and a pickup in exports boosted the results. But the pace of growth would have been a percentage point higher without the political chaos on Capitol Hill.
There is good news, however: Washington seems to be getting its act together. Lawmakers already have sealed a deal on a budget that averts the possibility of another shutdown for at least a year. And both parties said Thursday that they do not want another white-knuckle showdown over government borrowing when the federal debt limit goes back into force next week.
“We believe that defaulting on our debt is the wrong thing,” House Speaker John A. Boehner (R-Ohio) said Thursday at a House GOP retreat on Maryland’s Eastern Shore. “We don’t want to do that.”
Economists say the recovery is poised for takeoff once the fiscal headwinds fade. The pickup at the end of the year was particularly encouraging because it followed a surge in growth during the third quarter that some worried could not be sustained. The back-to-back gains are likely to shore up confidence that the recovery will not stall out again.
“The economy is really starting to move in the right direction,” said Tim Hopper, chief economist at TIAA-CREF.
The data show federal spending plunged at a 12.6 percent annual rate in the fourth quarter, as the government closed its doors for 16 days in October and lawmakers once again flirted with defaulting on the nation’s debt obligations. It was the steepest decline since the end of 2012, when many institutions preemptively slashed spending in anticipation of automatic budget cuts known as the sequester.
The Commerce Department said the full effects of the shutdown could not be quantified in the GDP report. But it estimated that reduced hours for furloughed workers shaved about three-tenths of a percentage point from economic growth, accounting for about a third of the total federal drag.
Lawmakers are loath to jeopardize the recovery again, particularly with midterm elections looming. Treasury Secretary Jack Lew traveled to Capitol Hill on Thursday for lunch with Senate Democrats, at which he and White House communications director Jennifer Palmieri reiterated the president’s insistence that he is “not paying ransom” to congressional Republicans to secure another increase in the debt limit.
Congress suspended enforcement of the debt limit until Feb. 7 as part of a deal to end the government shutdown. Lew told Senate Democrats that he will need another suspension or an increase in the limit before the end of February to avoid defaulting on the nation’s obligations. The national debt stands at nearly $17.3 trillion.
“There is no reason to hold anything hostage to getting a debt ceiling raise,” Senate Budget Committee Chairman Patty Murray (D-Wash.) said after the lunch meeting. “We just had a budget agreement. We had an appropriations bill. We determined where our spending is going to be. We now have a responsibility as the managers of this country to pay for that.”
Republican leaders agree that the debt limit should be raised, but they have also said they will demand some concessions in return. House Republicans met to discuss their options Thursday afternoon at their annual policy retreat in Cambridge, Md.
After the meeting, Boehner said Republicans must demonstrate that they are “not just the opposition party, we’re actually the alternatives party.” But senior GOP aides said they do not expect a decision on a debt-limit strategy until lawmakers return to Washington.
Senate Majority Leader Harry M. Reid (D-Nev.), meanwhile, plans to move forward on another front critical to the economy: extending federal benefits for the long-term unemployed. Those benefits expired in December, immediately cutting off more than 1 million people, and Republicans have balked at extending them for another year, as Democrats prefer.
Reid told reporters this week that bipartisan negotiators were “very close” to an agreement that would extend benefits for three months. The $6 billion price tag would be covered by “pension smoothing,” which would temporarily increase tax collections from employers by permitting them to pay less now into employee pension funds.
House Republicans remain skeptical of the proposal. But a deal to revive the benefits would put more money into people’s pockets, potentially providing an additional boost to economic growth this year.
The strong results for the final months of 2013 and the optimistic outlook for the recovery paved the way for gains on Wall Street on Thursday. The major indexes rallied on the brighter prospects for the U.S. economy following a week of anxiety over the health of developing countries.
Still, the recovery has encountered false dawns before. The GDP report overshadowed other data released Thursday showing a slowdown in pending home sales in December and an uptick in applications for jobless benefits last week. Some economists remain worried that the labor market is too weak to support the continued growth in consumer spending that has helped drive the expansion.
“It’s all predicated on job and income growth, which does not support the level of spending we’re seeing,” said Lindsey Piegza, chief economist at Sterne Agee. “I’m very concerned that businesses are going to pull back further at the start of the year.”
Others believe the recovery is at a turning point, however. Not only is the drag from Washington expected to dissipate, but economists expect states and local jurisdictions to start spending and hiring again after years of slashing their budgets.
Once government is out of the way, the robust private sector is likely to take center stage and the recovery should become more tangible, said Hopper, the TIAA-CREF economist.
“We’re going to feel better,” he said.
Lori Montgomery and Ed O’Keefe contributed to this report.