It was widely expected we'd see a drop in economic growth in the fourth quarter -- October, November, and December -- and sure enough, the initial estimates shows a slight contraction for the first time in years.
The economy shrank in the fourth quarter for the first time since the recession, but the U.S. still appeared to be on a modest growth path if unusual factors are stripped out.
Gross domestic product contracted by a 0.1% annual rate, down from 3.1% in the third quarter, based on the first of three readings by the Commerce Department.
That was well below the MarketWatch forecast of 1.0% increase. The advance GDP report, however, relies on some estimates and is often subject to sharp revisions.
The -.01% for the quarter is the first negative quarter since the spring of 2009, though this estimate will be revised in the coming months.
I should also note that this is not necessarily evidence of a new recession. Yes, the economy shrank a little in the fourth quarter, but the economy grew at a 2.2% clip in 2012, and most expect similar growth in 2013. Indeed, though no one's happy about this morning's report, there are some bright spots, including healthy consumer spending, business investments, and an improved housing sector. On the whole, the report really isn't that bad.
So why did we see slight contraction in the GDP? In large part because spending cuts -- federal, state, and local -- shaved more than a full percentage point off GDP growth.
I realize the right doesn't want to hear or believe this, but when Washington spends far less -- in this case, the cuts focused on defense -- it takes capital out of the economy and undermines growth. It is, as a practical matter, a form austerity, which hits the brakes on the economy. This is Economics 101 and yet Republicans continue to insist that it is the only policy they really care about.
It's something to keep in mind as the Beltway's preoccupation with debt reduction, not the recovery, continues unabated. It's also a reminder that the automatic sequestration cuts may very well push the nation closer to a recession this year.
Above, you'll find a chart showing GDP numbers by quarter since the Great Recession began. The red columns show the economy under the Bush administration; the blue columns show the economy under the Obama administration.