Analysts said the economy is still on track to grow steadily if modestly at a roughly 2 percent pace, as long as the housing and auto industries continue to recover.
The Commerce Department attributed the economic contraction mainly to companies restocking at a slower rate and to reductions in government spending on defense. While companies will ultimately have to rebuild their inventories, the cuts in defense spending could offer a hint of things to come.
The administration argued that the 22 percent reduction in defense spending was partly in anticipation of automatic spending cuts that were going to take effect at the beginning of the year. Obama and congressional Republicans averted that so-called fiscal cliff by extending Bush-era tax rates to all but the wealthiest Americans.
But the deal simply delayed the automatic cuts until March 1. At that point, the Pentagon faces across-the-board cuts of 7 percent, while domestic programs will have to shrink by 5 percent. Some analysts believe that if those cuts are allowed to occur, as some Republicans are now suggesting, the economy could lose a half a percentage point of growth."If the economy would continue to slow down, the interesting question is how does that affect negotiations in and around sequester, government spending, tax reform, the debt ceiling," said John Sides, a political scientist at George Washington University who studies the impact of economic data on politics. "To me it's not so much that an economic slowdown is going to hurt the president's ability to get things done, it's how it's going to affect the negotiations that we already know are going to happen." Some in the business community hope the experience in the last quarter will alert lawmakers to the potential economic damage the automatic cuts could create. "I don't think any time you see a reduction in economic growth that it's good news," White House press secretary Jay Carney conceded Wednesday.