The economy surprisingly shrank in the last quarter of 2012, with the gross domestic product falling by 0.1 percent. Many economists cautioned that this was just a temporary slowdown due to some unique factors. They point to other indicators, such as increases in consumer spending and a surge in equipment and software purchases by private businesses to bolster their view that the economy appears to be growing.
This assessment probably is right, but the fourth quarter of 2012 still should serve as a wake-up call. Part of the reason for contraction surely had to be uncertainty over dithering in Washington about the so-called fiscal cliff, a euphemism for automatic spending cuts and tax increases that were set to take effect at the end of the year unless congress took action.
Private firms did not invest in new inventory at the end of last year. That is what companies do when they are uncertain how to prepare budgets, not knowing how taxes may change at the start of the year. The military, meanwhile, cut spending by 22 percent in 2012, which affected the budgets of private contractors that supply equipment and other military needs.
But Congress, unfortunately, didn't solve much at the turn of the new year. It mustered a deal that averted the full brunt of tax increases that might have taken hold. But it did allow payroll taxes to rise, and that has pinched pocketbooks nationwide. More importantly, however, politicians merely agreed to kick the automatic spending cuts down the road a bit. Now a March 1 deadline looms. Without an agreement, the arbitrary cuts that loomed in December will take effect after all.
It might be better for them to take effect than for Congress to keep pushing uncertainty on the economy. In order to cut deficits and set the nation on a trajectory away from un-sustainable debt, Congress will have to agree sooner or later on cuts or tax increases that have the same overall effect. The impact of that likely would be temporary, however, and it could be offset in the long run by the confidence restored in the nation's ability to take tough action.
The signals of a recovery are undeniable. Stocks rose significantly during January. Business investment rose 8.4 percent in the fourth quarter of 2012 and after-tax income rose 6.8 percent. Housing markets are showing signs of recovery. However, two factors loom as drags on this surge. One is a persistent economic slowdown abroad. Europe and China continue to struggle, and that means weak demand for U.S. imports. The other is the U.S. government.
Americans have direct control over only one of these. A Congress that suddenly seems to have found the way to rationally deal with immigration reform needs to find similar courage to deal with federal budget issues.