In 4th Quarter, Economy Shrank For First Time Since '09

Transcript

STEVE INSKEEP, HOST:

It's MORNING EDITION, from NPR News. I'm Steve Inskeep, with Renee Montagne. Good morning.

Let's try again, shall we, to explain what it means when we hear that the U.S. economy shrank in the fourth quarter of 2012. As we've discussed elsewhere in the program, the decline was slight - just one-tenth of a percentage point - but it is the first contraction of the economy since the Great Recession officially ended in 2009. NPR's Jim Zarroli is with us once again in New York. Jim, good morning.

JIM ZARROLI, BYLINE: Good morning.

INSKEEP: We had technical difficulties, many people did not hear some of our discussion earlier. So let's go back to the basics, here. A decline in GDP, gross domestic product. What does that mean, and why did it happen?

ZARROLI: Well, it's a big surprise. I mean, the economy grew by 3.1 percent in the 3rd quarter of 2012, and then it just fell off a cliff, so to speak. You know, I think a lot of economists were expecting a slowdown, but nothing like this. And when you look at the reasons, first, there was a drop in federal - there was a drop in government spending overall, an especially big drop in federal government spending, and especially - particularly in defense.

There is also a drop in exports. We know a lot of companies, a lot of American companies that export, in particular to Europe, have seen a big slowdown.

So these are factors - these are the kinds of factors that take a bite out of growth. So, it's not a recession, technically, but it is a slowdown.

INSKEEP: OK. So a setback, of sorts. But let me ask about a couple of those things. You said a drop in federal government spending, particularly defense spending. The law didn't change a lot from the third quarter to the fourth quarter. So I'm trying to understand why defense spending would suddenly drop off.

ZARROLI: Well, it's probably several factors. I mean, for one thing, as I said, we saw a drop in government spending overall, but especially in federal government. Much of it was related to defense, and, you know, I think that the most important thing is we were approaching the fiscal cliff. There was a lot of concern being expressed about what would happen to government spending, what would happen to taxes at the beginning of the year. That is the kind of thing that has an impact on how much individual government agencies spend.

INSKEEP: I just want to make sure, Jim, that we - individual government agencies spend. Are you saying that some have actually held back on their spending to be prepared for the possibility of some kind of fiscal chaos in the new year?

ZARROLI: You know, it's not really clear. I don't think that we know the answer that yet. But it's - the fiscal cliff definitely seemed to be a factor in general. I mean, it also seemed to a factor in companies stopping - companies weren't adding to their inventories. They were sort of holding back on production because of concern about these issues.

So, I think, basically, you're seeing the problems in Washington - this inability to reach consensus on taxes and spending - sort of having a very concrete effect on the economy.

INSKEEP: OK. Well, that raises an interesting question, Jim Zarroli, because here we are now in a new quarter - we're in the first quarter of 2013, of course - and the fiscal issues are not resolved. Many of them have been pushed into the near future, even though there was a deal to avert the worse of the fiscal cliff at the start of the year.

ZARROLI: That's right. And one of the interesting things is the - this didn't seem to have as much of an impact on consumer spending. We actually saw an increase in that. So you could make the case that things - you know, even with all this, the stuff about the fiscal cliff, that things weren't as bad as they seemed, and that growth is, you know, going to resume, that this slight contraction we saw in growth was just temporary. And I think a lot of economists this morning are saying that. They're saying, you know, don't panic, that these numbers also could be revised. They very often are.

On the other hand, we've seen, you know, some increases in taxes at the start of the year, the expiration of the payroll tax holiday. And that could have an impact on consumer spending.

INSKEEP: If you're, say, the chairman of the Federal Reserve, do you look at numbers like this and think about whether you want to change your policies at all?

ZARROLI: Oh, definitely. I mean, you know, the Fed has been doing quantitative easing, which is buying up long-term assets as a way of getting money into the economy. It's very controversial. There's been a big debate within the Fed about: How long do you think we should keep this going before there's inflation? And I think these numbers just really strengthen the hands of those people at the Fed who say, we're not yet there yet. The economy's weak. You know, we have to do everything we can to keep the economy going. And the Fed is meeting today, and that's certain to come up.

INSKEEP: Jim, thanks very much.

ZARROLI: You're welcome.

INSKEEP: That's NPR's Jim Zarroli. He's in New York. He's helping us to understand a little about the news that the economy, according to the government, declined by one-tenth of a percent in the last quarter of last year. Transcript provided by NPR, Copyright NPR.