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Economy Shrinks, Why Do Some Believe U.S. is in Recovery?

31 January 2013 by

Economy Shrinks, Why Do Some Believe U.S. is in Recovery?

In what some find surprising, news broke on Wednesday that the U.S. economy shrank late last year. Others, however, are saying they’re not at all surprised and say it was just a matter of time since there’s so much upheaval in Congress and the Obama Administration. Of course, the massive cuts in defense spending played a significant role in what is the first contraction in several years. The contraction occurred during the fourth quarter of 2012 and the loss rate is 0.1 percent.

Havoc in the Economy

While this is no good for the economy and will certainly affect every consumer’s spending habits, from the way they use their credit cards to their ability to save in the new year, there’s a new wrinkle that while may not appear to be relevant, is sure to add to the continued frustrations of Americans and the contradictions are wreaking havoc in consumer trust. Remember, one week ago, President Obama said,

Economic recovery has begun.

A few of the headlines over the past 24 hours:

  • Another recession in the U.S. economy before a new upward business cycle is likely
  • The economy is precariously close to recession territory
  • The economy is not falling apart
  • Despite a Lousy GDP Report, U.S. Economy Is Primed to Expand
  • Five reasons bad GDP news is misleading

Many consumers are confused and are unsure where the truth comes into play. While no one bases their decisions solely on the breaking news emails, courtesy of a divided American media, if those consumers are unsure of where to get those facts, there are bound to be even bigger problems. Some believe the media’s role is to provide “an objective and trustworthy account of reality” or even “an attempt to reconstruct the essential framework” of an event. There was a time when the media’s word was worthy of the truth society placed on it. Remember, it’s the free press that should be an arena for public scrutiny of the government. Also, there is one economic dynamic that’s even mentioned in the Constitution and that dynamic is that of a free press.

Confused Consumers

The media should be where our elected leaders are held accountable for poor economic choices. Instead, consumers have no idea were the economy is headed and as a result, this can only lend to a continued effort to keep spending to a minimum. Those tax refund checks, instead of buying flat screens and iPhones, will be set aside by those unsure of what the rest of the year will bring. Remember, consumer spending is the biggest driving force in the economy. And consumers are not spending. In fact, there’s not even close to a consensus on how much, if any, the economy will grow this year.

The numbers aren’t providing any insight either. The stock market has surged more than 6 percent this year and is nearing an all-time high – even as this negative GDP hit the airwaves. Unemployment has barely budged and there are further spending cuts being put in place, too. This is raising red flags for many economists.

One way or the other, government is going to be a constraint on growth,

said James Marple, senior economist at TD Bank.

Spending Cuts

Come March 1, we’re sure to see those deep spending cuts in both defense and domestic programs and it appears our elected leaders have fallen so far behind in their responsibilities and continue to disagree on everything from spending to whether the sun rises in the east. The federal government is slated to come to a screeching halt if a measure that authorizes funding isn’t taken. A government default on debts is also barreling toward us. Of course, none of this bodes well for a divided political system. A weaker economy makes it difficult for the president to handle Congress as he seeks to move forward on other crucial issues, such as gun control.

For its part, the Federal Reserve describes it as a “pause” due to factors that are temporary and that growth should pick up as the year progresses. And there are contradictions in this too. At the same time, it said it would continue to stimulate the economy by keeping borrowing costs low for the time being.

Fiscal Cliff Changes

Remember the fiscal cliff that lawmakers annihilated for two years before missing a deadline? The solution, like most of them in recent years, were temporary and amounted to little more than pushing it aside yet again. There were no real changes made. It averted the fiscal cliff for one reason alone: it postponed the start of automatic spending cuts until March 1. The deal Congress reached with the White House to avoid the fiscal cliff only delayed spending of around $85 billion. At some point, though, those cuts are going to have to happen and, of course, the dems and pubs are at odds over what it ultimately represents. Republicans insist it’s the Democrats’ efforts of certain budgetary concessions.

As these small ticks move back and forth, the real move is found in defense spending, which plummeted more than 22 percent. This represents the steepest drop in more than four decades. The cuts were in weapons maintenance and personnel.

Credit Card Surcharges

All of this, coupled with rising bank fees and the possibility of new surcharges on our credit card transactions, makes it difficult to believe those who insist the economy is in recovery mode. The latest unemployment numbers will be released in 24 hours and even the analysts predictions are all over the place. Some say the temporary jobs that are typical during the holidays will finally drop out and no longer will play a role in the numbers. The weak growth could keep employers from hiring, too.

Finally, student loan debt is rising at alarming rates. This too is affecting consumers and serves as a reminder to many to keep spending in check.

What are your thoughts? Are you fed up with the media and its many contradictions? Ultimately, what do you think is in store for the economy? Have you reined in spending?

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