Heading toward recession? Not really (GDP version)

Like a lot of people, I was surprised to see Wednesday's report that U.S. GDP shrank by 0.1% between the end of September and December. But a quick look at the reasons why this happened shows the contraction to be a one-time dip, with the underlying numbers indicating an economy continuing to recover at a steady pace...unless Baggers try to get in the way of it.

The biggest reasons for the decline in GDP are obvious- major decreases in Government expenditures, and leaner inventories. After a surprising jump up in government expenditures in Summer, the decline in government spending that started with the end of the Census in Summer 2010 continued in the 4th Quarter of 2012, and reduced GDP by 1.33% for the quarter.

This decrease was led by a $42.5 billion drop in defense spending, and Brad Plumer of the Washington Post explained that this was caused by a combination of the end of the fiscal year in September and the prospect of the fiscal cliff.

"In the Pentagon, you have to use it or lose it by the end of the fiscal year in September,” said Lawrence Korb, a former assistant secretary of defense now at the Center for American Progress, in a recent interview. “You see this a lot. ‘We’ve got to fly a lot this month for training, otherwise Congress will take back the money they gave us.’”

Yet the ups and downs were especially sharp in 2012 — soaring 13 percent in the third quarter and dropping 22.2 percent in the fourth quarter. Part of that is due to the fact that defense spending is shrinking overall, thanks to budget pressures and the drawdowns in Iraq and Afghanistan.

Another possibility, as Michael O’Hanlon of Brookings told me, is that the Pentagon has been preparing for the sequester budget cuts that had originally been scheduled for January. (They’ve since been pushed back until March.) The Defense Department was facing the prospect of losing money that had already been budgeted over multiple years but hadn’t been spent. That led to a big spending spree in the third quarter, which was followed, inevitably, by a drought in outlays in the October through December.

Now I'm OK with the military being put on a diet, but there's also no question that this will drop the country's GDP as well (on the flip side, the invasion of Iraq went a long way toward warding off a double-dip recession in early 2003).

So if you pull out the defense-inspired austerity at the end of last year, you'll see that the private-sector economy kept on chugging along much like it has for the last 3 years.

Another item that held back our economy's growth at the end of last year was the largest drop in inventories in 2 years, which took away another 1.27% from GDP for the quarter. So if you isolate that one category, and go on final purchases of goods and services, you'll see that the U.S. had its 7th straight quarter of growth between 1 and 2.5%. And this chart even includes the declines in government spending over that same time period.

So you'd think that this would be a right-winger's fantasy- drops in government spending, a growing economy that continues to add jobs (more on that in an upcoming post), and a deficit that's dropped 23% in the last 3 years. And you would be wrong, as Politico's Glenn Thrush writes.

Tim Miller, also of the RNC, presented an argument on Twitter that is hard for the White House to refute: "Obama's 2nd term focus from speech to hill priorities has not been job growth. Simple argument to articulate."

Former CBO Director and McCain '08 adviser Douglas Holtz-Eakin put an even finer point on it: "This is what happens when you grow too slowly. If you're growing too close to [zero] you can't insulate against shock."

Brad Woodhouse of DNC evoked GOP snickering by retweeting an economist who claimed that it was "The best-looking contraction in U.S. GDP you’ll ever see.”...

The fact that the shock this time came from a plunge in defense/federal spending should, in theory, bolster Obama's contention that budget-cutting and trimming entitlement spending is the worst thing for the economy right now. It should, in a more Spock-like world, be an argument against the sequester cuts and big changes to Medicare and Social Security. Forget about that.

All nuance is lost in the howling gale of an economic "contraction" -- and the advantage, at least in the current news cycle, shifts to a down-in-mouth GOP. It's not likely to be a major shift in the dynamics of looming fiscal fights, but Republicans, in the words of one senior Hill staffer I spoke to this morning, "will take any leverage we can get."

Huh, and the Republicans wonder why they're in such a desperate situation to "take any leverage they can get." Ignoring the reality that GOP-style austerity is keeping our good economy from being even stronger goes a long way toward explaining why Republicans being rejected by the large part of America that deals with that reality, and decides their actions based on results instead of pathetic, failed poses.