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Shrinking GDP Doesn't Signal Recession, But Consider Yourself Warned

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SHRINKING GDP RECESSION
In this Tuesday, May 1, 2012, file photo, worker Maria Contrero, of Boston, removes an elite running shoe from a sole press during the assembly process at the New Balance Athletic Shoe, Inc. factory in Boston. Shrinking GDP in the fourth quarter has raised worries about another recession. (AP Photo/Steven Senne, File) | AP

Yes, U.S. gross domestic product shrank in the fourth quarter of 2012. No, it doesn't mean there was a recession.

But simply avoiding a recession is not anywhere close to good enough. There were extraordinary circumstances that made the U.S. economy shrink slightly in the quarter, true. A healthy economy should be able to withstand such blows.

The fact that the economy couldn't hack it highlights the absolute lunacy of Washington's feverish obsession with budget deficits, and the many risks ahead. It also helps explain why, even as the stock market blows back toward record highs, the Federal Reserve is still pumping cash into the financial system. The Fed, possibly the only entity in Washington that understands that the economy is still on life support, is expected to announce on Wednesday afternoon that it is continuing an aggressive bond-buying program to do its part.

GDP shrank at a 0.1 percent annualized rate in the fourth quarter, the Commerce Department said Wednesday morning. That was the first quarter of negative GDP since the second quarter of 2009, at the tail end of the Great Recession. Naturally, the "r" word was on a lot of lips and Twitter feeds after the report.

Economists hastened to point out some freakish circumstances that hurt growth in the quarter. For one thing, defense spending shrank at a whopping 22 percent rate, which slashed nearly 1.3 percentage points from the headline number. Inventories, meanwhile, cut another 1.3 percentage points from growth, as farms and businesses had to dig into their stockpiles to meet demand after Hurricane Sandy and amid a drought in the Midwest.

"Outside of these two very volatile components, underlying growth improved with a solid gain in business investment," Bank of America economist Michelle Meyer wrote in a report. "We believe today's report suggests upside risk to our forecast of 1.0% for Q1 GDP."

Great, but 1 percent GDP growth is no reason for anybody to start dumping Gatorade on each other. That's well below the economy's trend rate of growth, suggesting it is still vulnerable. Another couple of blows and we've got two straight quarters of negative GDP, and then people will start to take recession talk more seriously.

There's a technical definition of recession that we haven't come close to hitting yet. This is derived from a formula crunched by the math wizards at the National Bureau of Economic Research, the U.S. economy's official recession arbiters, and it includes stuff like industrial production, retail sales, income and employment. Most of that activity is still positive and moving in the right direction.

But the risks ahead are many. One of the reasons growth skidded in the fourth quarter was anxiety about the moronic fiscal-cliff debate. That austerity threat was replaced by a milder austerity plan that could well shave 1.5 percentage points from GDP growth this year. As part of that deal, the payroll-tax cut expired this year, meaning smaller paychecks for millions of Americans.

And some of the moronic fiscal-cliff debate -- namely, a fight over huge cuts to government spending -- was postponed until this spring. There it will be joined by debates over the funding of the government and a delayed debt-ceiling debate to form a Three Stooges of government obstinacy.

All of those debates will involve how best to tighten the government's belt. None of them will, as far as anyone yet knows, involve ways to bring down unemployment from nearly 8 percent or get the economy out of its funk.

So no, there's no recession yet. But if we're not careful, this may not be the last negative GDP report we see this year.

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