US and Europe

US economy heading for a self-inflicted recession?

Monday February 25, 2013 Hugh Dixon

GDP growth in the fourth quarter of 2012 dropped by 0.1 percent according to the data release on 30th January 2013 by the United States of America’s Bureau of Economic Analysis (BEA).  This was a very weak performance by the US economy on the back of third quarter GDP growth of 3.1 percent.  Compared to the fourth quarter a year ago, which saw a 4.1 percent increase in GDP.

There are three reasons behind this weak performance in the fourth quarter of 2012.  The first was cuts in Federal Government spending, which saw a 15 percent decrease in Government expenditure; secondly a sharp drop in private inventories, though this drop is likely to be temporary as storms briefly stopped movements of goods and services, leading to a run down in inventories; the third reason was lower exports of goods and services.

This weak performance in the fourth quarter of 2012, when combined with the upcoming sequester federal spending cuts, due to take effect on March 1st, could very well push the US economy into recession.  The sequester spending cuts are mandated Federal Government spending cuts of US$1.1 trillion over the next ten years, of which US$85 billion worth will be cut in 2013.  It is expected that Federal Government spending cuts, combined with other austerity measures, will cut around 1.5 percent points off GDP in 2013.

The US economy could be heading for recession in 2013 if the rest of the US economy cannot generate GDP growth of more than 1.5 percent.  To avoid this scenario, the private sector will need to provide strong growth in the economy through increased domestic consumption, job growth, and exports.  
The good news for the US economy is that there were significant growth in consumer spending (up 2.2 percent), residential investment (up 15.3 percent), and private investment in equipment (up 12.5 percent).  With strong growth in these three areas, an average of 210,000 new jobs a month were created in the non-farm workforce over the quarter.

To avoid a self-inflicted recession and continue to grow the US economy need to maintain the growth rates in consumer spending, residential investment and private investment in equipment.