The drop was driven by a plunge in military spending, as well as fewer exports and a steep slowdown in the buildup of inventories by businesses. Anxieties about the fiscal impasse in Washington also contributed to the slowdown. [... JP Morgan chief United States Economist Michael] Feroli said there were some hints the economy was performing slightly better than the headline number suggested.In fact, for the full year, the economy grew more in 2012 than it did in 2011. But the last quarter of 2012 serves as an example of what happens when the government abruptly slashes spending—and that's exactly what's scheduled starting on March 1 when the sequester starts taking effect.
The 22.2 percent drop in military spending – the sharpest quarterly drop in more than four decades – along with the drop in inventories and exports overwhelmed more positive indicators in the private sector, he said. For example, final sales to private domestic purchasers, which strips out government spending as well as trade and inventories, rose by 2.8 percent. “Consumers and businesses kept spending at a pretty steady pace,” Mr. Feroli said.
Republicans have always said that dramatic spending cuts will accelerate economic growth, but last quarter's growth figure once again put the lie to that fiction. It makes it clear that if House Republicans insist on implementing the sequester, they'll be directly responsible for tanking the economy.
Democrats are currently planning a strategy to chip away at the sequester on a piece-by-piece basis. Under their plan, explained in detail here by Brian Beutler, they'll offer up things like ending tax subsidies on oil companies to pay for postponing the implementation of the sequester. It's a pretty good plan, but the key to making it work is to remind the public the reason the economy slipped towards the end of the year is that we cut spending. Fortunately, we still managed positive growth for the year, but it would be the definition of insanity to move forward with more draconian spending cuts in the first quarter of 2013 given what we just saw happen in the last quarter of 2012.