Analysts had expected GDP growth to be 1 percent to 1.2 percent. Fiscal fights ding economy

No one is predicting a "double-dip recession" yet — but Wednesday's negative-growth GDP reading put to rest the question of whether Washington’s budget wars can damage the economy.

They just did.


And with two major fiscal fights looming early this year, it's got policymakers worried there could be more grim news on the horizon for an economy already barely pulling itself out of the doldrums.

( Also on POLITICO: Obama's GDP nightmare)

On its face, the 0.1 percent fourth quarter GDP contraction — the first negative growth since the middle of 2009 — announced by the Commerce Department drew mixed reactions from economists, many of whom saw positive news beneath the headlines, so long as Washington doesn’t keep getting in the way.

Analysts had expected GDP growth to be 1 percent to 1.2 percent. Still, investors appeared to shrug off the GDP number, as the Dow Jones Industrial Average was down slightly in morning trading.

While federal, state and local government spending, private inventory investment and exports were down, personal spending was up by 2.2 percent, more than its 1.6 percent increase in the third quarter.

Nonresidential fixed investments also increased 8.4 percent, reversing a decline in the previous quarter.

But the fourth quarter ended just as lawmakers and the White House were battling over the fiscal cliff. And Congress and the White House are now wrangling over what to do with a round of spending cuts, including major curbs on Pentagon spending, set to take place on March 1 — and a possible government shutdown in late March — that some economists have warned could further slow economic growth.

( Also on POLITICO: Krugman: U.S. has 'running room')

Noting that “federal defense spending declined precipitously, likely due to uncertainty stemming from the sequester,” Alan B. Krueger, chairman of the White House’s Council of Economic Advisers, downplayed the report in a blog post. Instead, he said that “today’s report is a reminder of the importance of the need for Congress to act to avoid self-inflicted wounds to the economy. The administration continues to urge Congress to move toward a sustainable federal budget in a responsible way that balances revenue and spending, and replaces the sequester, while making critical investments in the economy that promote growth and job creation and protect our most vulnerable citizens.”

Nonetheless, the number comes at an inopportune time for the White House as it tries to move beyond fights with Republicans over the economy and focus on new policy pushes on immigration reform and gun control.

Reduced federal spending played a major role in the economic slowdown — particularly reductions in the Pentagon’s war spending, with defense spending decreasing 22.2 percent, compared to a 12.9 percent increase in the previous quarter.

Wednesday's release was the government's first attempt at measuring growth in the fourth quarter, and the Commerce Department cautioned it could be revised when new estimates are released in February and March.

House Majority Whip Kevin McCarthy threw the brinksmanship argument right back at the White House and Senate Democrats, saying, “Today’s report by the Commerce Department showing that the economy contracted at a rate of 0.1 percent is a stark example of how political games in Washington have real consequences on the lives of American families.”

Reince Priebus, chairman of the Republican National Committee, tweeted that “the bad GDP news makes it even more unbelievable that Obama has been ignoring job growth in his 2nd term agenda. Priorities are backwards.”

But former CBO Director Douglas Holtz-Eakin, now with the conservative American Action Forum, tweeted, “Economy in short: mixed at best, still not strong. In need of real, long-term deficit reduction.”

And a range of other economists saw encouraging news.

Peter Newland at Barclays Research wrote to clients that the defense spending drop could be “payback” for the third-quarter rampup. Beyond that, he said the “extent of further declines will depend on the outcome of the sequester debate, but such sharp retrenchment is unlikely in our view.”

Otherwise, he said, the GDP report was largely positive. “For that reason, we would suggest caution in reading the very weak headline GDP number as a true loss of momentum, and we believe monetary policymakers will agree,” Newland wrote.

And Paul Ashworth, chief U.S. economist at Capital Economics, said in a memo to clients, “Frankly, this is the best-looking contraction in GDP you'll ever see. … It definitely doesn't indicate that the economy is plunging headlong into another recession.”

Justin Wolfers, a professor of economics and public policy at the University of Michigan, said on Twitter that “I'm seeing use of the “R” word. That's *way* premature. The US economy is growing, although probably slower than potential.”

The report comes less than a month after Congress and President Barack Obama temporarily went over the fiscal cliff but then struck a deal to extend the Bush-era tax cuts for most taxpayers.

Economist Adam Hersh at the liberal Center for American Progress echoed the White House, blaming the contraction on fiscal brinksmanship.

“Today’s GDP numbers show the toll that political conflict over fiscal policy is taking on U.S. economic growth. The 0.1 percent economic contraction puts the United States on the precipice of recession,” he said. “That contraction is now unfolding, and we know what will happen if policymakers don’t work to scrap the sequester and eliminate the useless debt limit policy: We will have slower economic growth and job creation this year and in the future.”

This article first appeared on POLITICO Pro at 9:07 a.m. on January 30, 2013.