White House blames ‘fiscal cliff’ fight, Sandy for GDP decline

The White House on Wednesday blamed a surprising economic decline in the fourth quarter of 2012 on the uncertainty of the ’fiscal cliff’ feud with Congress and the effects of Superstorm Sandy.

Alan Krueger, chairman of the president’s Council of Economic Advisers, said the first contraction of the GDP in 3½ years was partly because “federal defense spending declined precipitously, likely due to uncertainty stemming from the sequester” — deep automatic defense and non-defense spending cuts that were narrowly avoided at the end of last year. He also said Sandy, which struck the East Coast in late October, “disrupted economic activity.”

The poor economic report was a blow to start President Obama’s second term, after he waged a re-election campaign grounded in his promise of better days ahead for the middle class. The fourth-quarter slowdown was a sharp drop from the 3.1 percent growth rate in the July-to-September quarter.

Mr. Krueger said federal defense purchases dropped by an annual rate of 22.2 percent in the fourth quarter of 2012, the largest decline in 40 years. The so-called fiscal cliff would have imposed steep cuts in defense spending in an effort to reduce deficits; Mr. Obama and congressional Republicans agreed on Jan. 1 to delay the cuts for two months while they negotiate on a longer-range budget deal. They also agreed to extend tax cuts for families earning less than $450,000 per year.

Mr. Krueger said that other economic indicators “suggest that the economy continued to recover in the fourth quarter, despite the impact of Hurricane Sandy and uncertainty surrounding fiscal issues.” For example, industrial production rose by 1.0 percent.

“Today’s report is a reminder of the importance of the need for Congress to act to avoid self-inflicted wounds to the economy,” Mr. Krueger said. “The administration continues to urge Congress to move toward a sustainable federal budget in a responsible way that balances revenue and spending, and replaces the sequester, while making critical investments in the economy that promote growth and job creation and protect our most vulnerable citizens.”