The revised 4th quarter GDP number was -0.1%. This is the first negative GDP growth number since 2Q 2009, when the Great Recession ended.
As a rule of thumb, two contiguous quarters of negative GDP growth are generally considered a recession. Although, technically, the US is in recession whenever the National Bureau of Economic Research deems it so.
However, most economists do not interpret this minor pullback as a harbinger for another recession. Although there have been some slowing features in the private economy – such as lowered exports and a reduction of business inventories – the primary driver of the negative GDP number is a deep reduction in government spending, particularly in defense. After reading the official reports from the FOMC and other economists, the overarching reading of the negative GDP number is, in fact, guardedly optimistic.
Our quarterly market commentaries and several of our monthly newsletters (particularly, our newsletter on Federal Reserve Policy and our examination of the Housing Market) have examined the government’s ability to offset the private economy’s direction. After the financial crisis of 2008, a pullback in the private economy was partially offset by government measures like large scale fiscal stimulus and accommodative monetary policy. In the subsequent years, the private economy has regained stable footing, although not the recovery of growth typical to post-recession recoveries. Private consumers have largely de-levered, and reset their borrowing, saving, and spending patterns closer to long term historical norms. Aside from the financial sector, corporate America faced the recession with cautiously, with a great emphasis on cutting costs, maintaining high cash reserves and not overextending themselves. At this point, the laggard of relative strength is the government spending.
Put another way, the large scale government actions have bought us time and shifted the burden of debt fueled growth and spending from the private sector to the public sector.
I will leave it up to other economists to figure out if the government actions were worth the cost. We know the costs we currently bear - several trillion in additional deficits over the past several years and some concern about excess inflation. However, it would be difficult to infer what would have happened to the world economy without the US’s additional measures. Economists trying to predict what a hawkish government might have meant for the US economy can find data points for comparison in history and other economies. For example, the situation in Europe mirrored much of our problems and a hard line approach, like Greece’s current austerity measures and the ECB’s early recalcitrance against monetary easing (fearing a hyperinflationary environment like the Weimar Republic of post WWI Germany) is a valuable scenario to consider. Still, if the US had taken a hard line approach, the situation in Europe would probably have been substantially worse than it already is, with the real possibility of a systematic collapse like the Great Depression. In other words, the interdependence of world economies makes it prohibitively difficult to accurately predict the consequences of any individual player’s actions. Given the fear of a total collapse, US policy makers felt justified bearing costs they could, at least, comprehend.