At the end of February, the Bureau of Economic Analysis (BEA) released an upward revision to its fourth-quarter 2012 economic growth estimate. It turns out that rather than shrinking a little in the fourth quarter, the U.S. economy may have actually grown slightly. However, the revision amount and growth estimate are not enough to warrant any real cheer. Originally, the BEA had estimated that real Gross Domestic Product (GDP) declined by 0.1 percent in the fourth quarter of 2012. Now, its revised estimate is that the economy grew by 0.1 percent. Though there is some psychological benefit to seeing the number turn from a negative to a positive, the fact is that the two numbers represent pretty much the same thing -- an economy that seems to have lost momentum.
Fading optimismThe fading optimism about the economy can be measured in both the numbers and the news headlines. In the third quarter of last year, the economy grew at an annual rate of 3.1 percent after inflation. That's a solid growth rate, and seemed to signal that growth was accelerating. Seeing that growth all but disappear in the fourth quarter means the economy is starting 2013 in pretty much the same way it began every year since the Great Recession: struggling to find its footing. So far, the economic news in 2013 has been dominated by budget disputes in Washington -- first the fiscal cliff and now sequestration. Given the size of the national deficit, some government spending cuts are necessary, but the government's failure to agree on a long-term plan for managing those cuts creates an uncertain environment in which consumers and businesses cannot make plans with confidence. That lack of confidence is likely to continue to hold the economy back.
Negative impactHere are some of the consequences of the chronically slow economy:
- Persistent unemployment. The most direct negative impact of the slow economy is that it keeps too many people out of work. Even people with jobs are often facing low wages, declining benefits, and little security -- hardly a formula for building prosperity.
- Low bank rates. Low interest rates on savings accounts and other deposits have decimated the earning power of savers. While lowering interest rates has been the Federal Reserve's tactic for stimulating the economy, people with CDs, savings accounts and money market accounts have paid a heavy price.
- Potential asset bubbles. Last year, the U.S. stock market rose by 13 percent, even though operating earnings actually declined slightly. Low interest rates can cause speculative inflation of asset prices, and those bubbles tend to be very disruptive when they burst.