US Economy Stalls: GDP Decreases in Final Quarter of 2012 – Unexpectedly?

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GDP shrank in the 4th quarter of 2012, but why? Image Credit: Svilen Milev

GDP shrank in the 4th quarter of 2012, but why? Image Credit: Svilen Milev

GDP decreased in the last quarter of 2012 – is the U.S. economy shrinking again?

The Bureau of Economic Analysis has released preliminary Gross Domestic Product (GDP) figures for the fourth quarter of 2012. GDP, which measures levels of output of both goods and services across the whole of America and serves as a general indicator of the health of the country’s economy, decreased by 0.1% when compared to third quarter reports.

It is the first time in the fiscal year that GDP shrunk. The first quarter of the year saw growth of 2.0%, in the second it increased by 1.7%, and the third quarter brought an increase of 3.1%.

Economy Shrinking? How ‘Unexpected’ Was This Dip?

Increasing GDP is the primary indicator that an economy is growing. The steady increase throughout the first nine months of 2012 made it appear that the U.S. economy was recovering successfully; moving the country further from recession.

However, despite the figures and analyses pointing to the expectations of recovery of the economy for the majority of the year, 2012 saw record numbers of families struggling to make ends meet, and registering for public benefits such as food stamps. The realities of the economy, as opposed to the analysis of economic indicators, suggested that the financial affairs of the average American family were far from recovered.

The Price Index, which measures the cost of products and services, rose every quarter in 2012, including in the fourth, in which it increased by 1.3%. This means that, as a nation, the U.S. is spending more on everyday items, with huge numbers of the population facing the prospect of managing these price increases along with the tax hikes and benefit cuts planned in Obama’s new fiscal policy.

U.S. Economy Shrinking: Why has GDP Decreased?

The primary factors in the decrease are reductions in federal government spending, inventory investment, exports, and state government spending in general. Federal government expenditure decreased by 15%, which is a stark contrast the increase of 9.5% we saw in the third quarter. National defense spending, which had also grown in previous months, dropped by 22.2%.

Overall, GDP in 2012 still increased 2.2% in comparison to the previous year, but with further reductions in spending planned, many will now be questioning when and if the economy will recover, and what impact these significant spending cuts will have on figures in 2013.

GDP Dip and The Not-So-Recovering Economy

The fourth quarter GDP results are, perhaps, an inevitable outcome of a pivotal financial year for the country. It seems the government and economy as a whole are starting to feel the pinch that the American public has been enduring all year long.

Resources

Bureau of Economic Analysis. National Income and Product Accounts. (2013). Accessed January 31, 2013.

Bureau of Economic Analysis. National Income and Product Accounts. (2013). August 2012. Accessed January 2013.

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© Copyright 2013 Amanda John, All rights Reserved. Written For: Decoded Science

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