The incredible shrinking US economy

OK, lesson learnt. Best not to pin our hopes on the US economy helping everyone else to boom their way out of recession.

by Michael Northcott
Last Updated: 19 Aug 2013

If you were hoping for some solid economic data to come paddling across the Pond during 2013, you’re going to have to go back to the drawing board. Initial estimates from analysts suggest that the country’s GDP contracted by 0.1% in the final quarter of 2012. The last thing anybody wanted.

It’s not the best news, considering that even economic boffins everywhere were not expecting it to shrink at all, and in the previous quarter, the economy actually grew 3.1%. If the estimates are proved correct when the country’s official stats come out, it will be the first GDP contraction the US has suffered since the height of the original recession back in 2009.

For a bit of context, there were fears right up until the last minute in 2012 that the US was about to drop off the edge of what is known as the ‘fiscal cliff’, where the cost of borrowing means that automatic spending cuts and tax rises come into effect. This would be an emergency method for trying to balance the books slightly. Thankfully, a cross-Congress deal was reached to avoid such a calamity – the cut off point would have been the 1st January. Who knows how bad the effects would have been on the global economy?

Experts think that part of the reason for the contraction is because of the biggest cut in federal defence spending since 1972 (a 22% chunk of the budget has been wiped off the books), meaning the extended supply chain has taken a pretty substantial hit.

Meanwhile, closer to home, the pound has dropped to its lowest in a year against the euro, meaning things still ain’t that great back in Blighty, either. Seemingly the UK’s largest companies are no longer feeling the pinch, as the FTSE 100 simultaneously climbed to its highest for five years, nudging over the 6,000 mark for the first time in that period. 

Still, in the US, consumer spending did pick up a touch in the final quarter last year, and residential investments (people buying houses) increased by 15% compared with the previous quarter, which some are saying means there is underlying momentum in the US economy. 

Let’s hope there isn’t a Q1 of contraction in the US, otherwise we may as well all pack our bags and start again somewhere else in the solar system. The economic carnage here just does not seem to be abating…

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