Economists Downplay Weak U.S. Growth Rate

The economy shrank a bit in the fourth quarter and analysts are trying to figure out why. It's clear that declines in business inventories and government spending played a role, but was the real problem the narrowly averted fiscal cliff?

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RENEE MONTAGNE, HOST:

This is MORNING EDITION from NPR News. Good morning, I'm Renee Montagne.

STEVE INSKEEP, HOST:

And I'm Steve Inskeep.

This is normally the time when we would tell you why the latest news is important.

MONTAGNE: Today, experts are telling us a news event is less important than it seems.

INSKEEP: The U.S. economy shrank in the fourth quarter, declining one-tenth of one percent. That is not great news but the question is why it happened.

MONTAGNE: And in this case economists are pointing to a lot of one-time factors. A look at those factors helps us understand how the economy is evolving.

INSKEEP: NPR's Jim Zarroli has been asking what happened.

JIM ZARROLI, BYLINE: On the face of it, the Commerce Department report looked like pretty bad news and no one seemed to see it coming. The U.S. economy shrank for the first time since 2009, falling by a tenth of a percentage point. The drop could be attributed to several factors. First, the U.S. sold fewer goods to other countries, especially in Europe.

Joseph Gagnon is a senior fellow at the Peterson Institute for International Economics.

JOSEPH GAGNON: Our imports fell a bit too but exports fell even more. And the rest of the world is just weak and not buying U.S. exports. And that is probably going to continue for a while longer.

ZARROLI: In addition, U.S. companies cut back on the amount of inventories they held and produced less. That appears to be tied in part at least to anxiety about the package of tax cuts and spending reductions known as the fiscal cliff. It left a lot of companies worried that demand for their products would fall.

At the same time, there was a 15 percent drop-off in federal government spending. Military spending fell even more. Former Federal Reserve Board member Alan Blinder says this is part of an ongoing trend.

ALAN BLINDER: Government spending, contrary to myth, has been on a downward trend for years now. It, of course, went way up in the stimulus. But ever since that it's been coming down.

ZARROLI: But Blinder also says the huge drop in government spending last quarter may be an accounting aberration. Government spending had soared in the third quarter so by contrast fourth quarter numbers looked unusually bad. Blinder says the drop in government spending and the decline in inventories took a toll on growth. But he says things aren't as bad as they seem.

BLINDER: If you take away those two things and sort of smooth through the two quarters together, it looks a lot like the limping along but moving slowly uphill scenario that we've been seeing for several years now.

ZARROLI: Other economists agreed, downplaying the drop in growth and predicting that the economy would continue to grow modestly in the months ahead.

Stuart Hoffman, chief economist at PNC Financial, notes that yesterday's report contained some nuggets of good news that offset the drop in growth. For one thing, even as growth was slowing, consumers continued to spend.

STUART HOFFMAN: Business investment, consumer spending, housing, you know, showed much better gains than that. And I think that's probably the sign of what's to come.

ZARROLI: The report came out just as Federal Reserve officials were finishing up a two-day meeting, where they once again voted to keep interest rates at historically low levels. In a statement, Fed officials said economic growth had paused in recent months. They also said they would maintain their program of bond purchases called quantitative easing. The program, which is aimed at stimulating growth by driving down interest rates, is controversial. Critics complain that it will eventually lead to higher inflation.

But Joseph Gagnon says yesterday's Commerce Department report doesn't bear that out.

GAGNON: One of the interesting thing is that inflation continues to be below their target. And if anything this data show even more weakness in inflation.

ZARROLI: With inflation so low, the Fed has plenty of room to maneuver and is under less pressure to stop its bond purchases. If anything, yesterday's surprise decline in growth underscores just how weak the economy remains. And Fed officials made clear they're ready to keep doing what they can until that turns around.

Jim Zarroli, NPR News, New York.

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