Can We Blame Uncertainty for Drop in 4th Quarter GDP?

Wednesday’s news wasn’t the best.

For the first time since the recession ended, the economy contracted in the fourth quarter – it decreased at an annual growth rate of 0.1 from the third quarter.

Why?

There are the concrete numbers – spending cuts reduced national defense expenditure by 22.2 percent and exports fell by 5.7 percent. But that is only half the story.   

Uncertainty surrounding the fiscal cliff is presumed the other player.

But a recent article by David Wessel of The Wall Street Journal claims the opposite is true.

A recent survey by the National Association for Business Economics found three-quarters of respondents said the uncertainty surrounding the fiscal cliff had no effect on hiring or spending. Yet, time and time again, reports in the Federal Reserve’s most recent Beige Book cited it as a reason to hold off on in the same two categories.   The reports don’t exactly line up.

So how could uncertainty play into the coming year? Is it even a factor to consider at all?

As Wessel points out, we know what the tax rates will be for 2013.  We know the federal government won’t shut down – well, at least until March.

At the moment, the numbers – aside from GDP – are telling a good story.  The stock market is humming, the housing market is picking up, and auto sales aren’t too bad either.  The Federal Reserve put tied interest rates to the unemployment rate, announcing a target number for the first time in its history.  So borrowing is guaranteed to be cheap for a while longer.

With information, consumer confidence should return in full force. But most analysts predict a steady economic growth rate in keeping with the 2.2 percent growth we saw this year.  Will less uncertainty make a difference? Only time will tell.

Read David Wessel’s story here: If We Can’t Blame Uncertainty, What Is Weighing On Growth?

- Courtney Ridenhour