US GDP Numbers At 0.1%, Sequester To Kick-Start

The United States (US) recently came up with a couple of major announcements. The first one was its GDP numbers for the December 2012 quarter, while the other one was about beginning  the sequester (compulsory spending cuts) from March 1, 2013. The US markets closed marginally lower in red on account of these; with Dow Jones closing 0.15% lower at 14,054, while S&P 500 closed down by 0.09% at the level of 1515.

Let’s take a look at the GDP which grew by 0.1% in the December 2012 quarter, well below the Wall Street’s expectations of around 1% for the quarter. According to media reports, stronger residential constructions and an improvement in exports pushed the growth northwards. This was offset by a decline in government spending as against the estimation and also due to lesser inventories. Further, the number came in much lower in the September 2012 quarter as the economy expanded by 3.1%. The numbers hint that the world's largest economy will take some time to reinstate growth in spite of showing some signs of having substantial strength.

The next most important  was the declaration of sequester. This term which sounds somewhat alien, means a default punishment, i.e. If the joint committee (which consist of the members of both the Republican and Democratic Party) fails to bring out a proper roadmap to reduce the debt burden and bring down the deficit, then there would be some compulsory spending cuts. These mandatory cuts are known as sequesters. Well this is not the first time the US is going with this system, they have done so earlier in 1980 and 1990, according to one of the media reports.

The reports suggest that the US Budget Control Act of 2011 had estimated a spending cut of roughly USD 1.09 trillion in the period starting from January 2013 to September 2013, which could be further extended to the end of the fiscal i.e. December 2013. However, the committee did not make a clear decision on the same and was postponed for two months till the end of  February 28, 2013. The committee, on February 28, 2013, was also not able to grant a proper solution and hence starting today (March 1, 2013), automatic spending cuts would take place in the country. An approximate USD 24 billion of spending cuts were made in the future government bills and the pending USD 85 billion, would begin from today.

The spending cuts would obviously have a negative impact on the economy. As the demand in the economy would be curbed, it would further lead to a potential slower growth and higher unemployment. According to the US, Congressional Budget Office (OBC) spending cut of USD 85 billion would lead to nearly 7 lakh of job loss and would bring down the overall growth of the US economy by 50 to 60 basis points.

Even the International Monetary Fund (IMF) has said that it might slash the growth approximately by 50 basis points to 1.5% for 2013. The US economy has faced such kind of headwinds earlier and has fought back on that front. Nevertheless, one has to take a ‘wait-and-watch’ approach on the same and we would keep the readers updated regarding the same as and when the situation arises.