The economy unexpectedly shrank in the fourth quarter of 2012. Such was the headline on Wednesday when the government released its report on total economic activity, a metric know as GDP.
The headline is a bit jarring, and I must admit to a morning cringe when I saw the news. As is so often true, however, the real story is beneath the headline, and in this case the real story is actually quite positive.
First let’s admit it, while most economists forecasted a slight rise in GDP during the fourth quarter, with Hurricane Sandy and all the drama over the “fiscal cliff” should we be completely shocked the economy took a breather late last year?
This is where the good news comes in, because despite the unique economic challenges faced last quarter the most important components of GDP, personal consumption and business spending both rose more than expected.
Growth in these all important areas was not enough, however, to offset declines in exports, as Europe and China continue to provide headwinds, and government spending experienced its largest decline in quite some time as the U.S. winds down wars in the Mideast.
I remember a headline from CNBC during the fiscal cliff debate stating “The Era of American Austerity Is About to Begin." We are used to hearing about austerity in the context of the Greeks and the Spanish, but these high profile beleaguered have budget problems dwarfed by the spending issues facing our federal government.
Despite the president’s soaring central planning rhetoric, and despite the Republicans “no tax hike” pledges, the prudence of the American people is demanding Washington get its act together. The fourth quarter government spending reductions may just mark the dawn of this new era.
The first round of the new era of austerity includes the tax rate hike and expiration of the payroll tax holiday that has now kicked in (notice the smaller paycheck?). The second round is likely to see the phase in of the $120 billion in defense and discretionary spending cuts required by the so called “sequester” from the 2011 debt ceiling compromise.
I believe investors, as indicated by the flat stock market after the GDP news, are prepared for slower growth at the hands of a shrinking government.
So while no one likes to see a headline of a shrinking economy, let’s hope the story underneath is indicative of what is to come: the resurgence of the business sector, the growing confidence of the consumer and most of all a government distracted getting its own house in order and less focused on “helping” the rest of us in the real economy.