Brief pause in growth no worry to economists

Posted: Feb. 2, 2013 2:11 pm Updated: Feb. 23, 2013 9:15 pm


THE ECONOMY'S surprise fourth-quarter contraction is being treated by economists as a hiccup and not a harbinger that the recovery is in trouble.

The decline announced last week was small, 0.1 percent, but still a shock after more than three years of steady but unspectacular growth. The people who worry about these things weren't worried. The Federal Reserve blamed it on "weather-related disruptions and transitory factors."

One of those factors was a 22.2 percent drop in defense spending, the largest since 1972. The Financial Times says the drop in defense spending alone knocked 1.3 percent off gross domestic product for the final quarter of 2012.

How "transitory" a factor that is depends on whether Congress goes through with massive across-the-board federal spending cuts in March. While the war in Afghanistan is winding down, the Pentagon is not above some pre-emptive belt-tightening to warn the lawmakers off blindly cutting defense spending.

Government spending has been a drag on the economy generally, declining for the ninth time in 10 quarters.

But a healthier private sector has proved able to shrug off those cuts, and economists are still looking for a strong recovery. Both consumer spending and business investment rose during the quarter. Employment remained strong. USA Today noted that Americans' disposable income rose 6.8 percent for the quarter, a four-year high. The share of their income being used to pay off debts fell to 10.6 percent, a 29-year low.

Locally, Prince Agri Products is moving forward with a $4 million, 12,000-square-foot building which will house manufacturing for a newly-acquired specialty product line in the South Quincy Development District.

Manchester Tank and Equipment is in the middle of a $3.4 million, 37,500-square-foot expansion at the company's 34th and Wismann Lane facility. Titan International saw record revenue of $1.9 billion in 2012 and is completing a 100,000-square-foot facility at the former Huck Fixture building.

Meanwhile, Knapheide Manufacturing added 200 jobs in 2012 and plans to add another 40 this year, and Blue Cross Blue Shield of Illinois added more than 150 jobs during the past year and a half.

In one of the hardest-hit sectors of the economy, housing, prices nationally rose more than 5 percent in November over a year earlier. An increase of that magnitude had not been seen since 2006, right before the real-estate bubble burst.

In Quincy, local home sales rose 13 percent in 2012 and the average sale price was a record $125,750, according to the Quincy Association of Realtors.

A separate Labor Department report released Friday revealed a notable shift in the job market: More hiring by construction companies. They added 28,000 jobs in January and nearly 100,000 over the past four months. Those job gains are consistent with a rebound in home construction and a broader recovery in housing.

The solid hiring in retail, construction, restaurants and hotels suggested that such companies expect consumer spending to hold up in coming months.

For all of 2012, the economy grew at 2.2 percent -- not great, but not bad, either. Most economists predict it will continue to perform at that level for 2013. However, some optimists are forecasting growth in excess of 3 percent.

Still, the contraction last quarter points to what are likely to be key challenges for the economy this year: the prospect of sharp government spending cuts and uncertainty over whether Congress will agree to raise the federal borrowing cap.