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The U.S. Economy Is Shrinking: Now Is the Time to Worry

Photo courtesy of Wikimedia commons.

MAD magazine’s Alfred E. Neuman was always shown with a grin on his face, captioned, “What, me worry?” Well, now it is time to worry. 

The release of the advanced GDP numbers—measuring all goods and services produced in the United States—for the past three-month period of 2012, shows the economy shrinking. Why? Well, personal consumption—all those Christmas gifts—grew by 2.2%, a growth rate faster than in the preceding quarter. Non-residential fixed investment, what businesses are buying to increase their economic activity going forward, jumped by 8.8%, almost six times faster than in the preceding quarter, and imports dropped significantly (a drain on the system, since that is money going abroad), so that the net effect of exports and imports was a boost of 5.7% to the economy. So, if people are buying more, business is investing more and imports aren’t sucking the wind out of the economy’s sails, where did we go wrong? Federal expenditures plummeted by 15%. The big chunk of the drop from federal expenditures came in defense expenditures.

Why was there such a big drop in defense expenditures? The answer is “sequestration”—the across-the-board cuts to defense and non-defense spending that were supposed to take effect at the end of December 2012.  The effect of these pending cuts was to force federal agencies to limit their contracting activities.  Federal agencies operate on a fiscal year, from Oct.1 to Sept. 30.  So, with uncertainty as to what could be obligated for the rest of the fiscal year, agencies had to cut back to contracting activity.  

The tax deal reached on New Year’s Eve postponed these across-the-board cuts for two months, but the die was already cast. The “fiscal cliff” that everyone thought we had avoided wasn’t really avoided.   

We need to worry because it isn’t going to stop. The debate in Washington continues to be, “How much more do we shrink the government?” The second shoe that is about to drop is the delayed “sequestration” cuts to government spending, which are scheduled for March 1. Much government spending consists of pass-throughs to state and local governments to help build on-ramps to new local economic development projects, buses for public transportation, special education and reading specialist teachers, police officers and improvements in public housing. The weakest sector of the economy since 2008 has been the public sector.  We have lost more than a quarter million school teachers, a huge chunk of the almost 600,000 local government workers we have lost. 

This year is off on the wrong foot in the wrong direction continuing the path of lost chances to make the investments to build our future—and now, clearly, to have a strong economic recovery. Continued debates on cutting government is to have the government pull the economy down in the immediate term, and our future in the long run. 

This is why working families are calling on all elected officials to protect Social Security, Medicaid and Medicare from benefit cuts, cancel sequestration and close loopholes for Wall Street and the richest 2% of taxpayers.

William Spriggs is the chief economist at the AFL-CIO.  

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Tagged under:
consumers
economy
GDP

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