The economy shrank last quarter at an annualized rate of 0.1 percent. Granted, it’s the first contraction in more than three years, and it surprised a lot of economists. The end of world, it ain’t.
In some cases, a negative Gross Domestic Product would be alarming, but that is not the case this time, says Nigel Gault, chief U.S. economist at IHS Global Insight.
“This is something where it’s best not to focus on the headline but to be comforted by the details,” he says.
But as nice as it would be, in this case comfort doesn’t mean chocolate ice cream. It means rising numbers like consumer spending and private sector investment. Gault says lots of the stats that make up the GDP are doing just fine.
So what happened? Randy Kroszner, former Federal Reserve governor and current professor of economics at the University of Chicago’s Booth School of Business, notes three reasons for the drop.
“One is federal government spending, especially defense spending fell. Inventories, that is those products on the shelves that firms have, went down significantly and exports fell a bit,” he says.
And then there was Hurricane Sandy. Feel more relaxed now? Well, hold on just a minute.
Don’t forget about the fiscal cliff. If automatic budget cuts can’t be avoided, Barry Bosworth, an economist at the Brookings Institution, says today’s report could be a taste of bad things to come.
The real lesson here, say both Bosworth and Nigel Gault, is further cuts in government spending are not a good idea. But don’t panic Congress — is bound to figure something out.