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Wednesday, January 30, 2013

U.S. economy shows decline, led down by sharp drop in government spending, but 192,000 jobs created in January

Update: In other big economic news, the private payroll processor ADP says the economy created 192,000 jobs in January, beating the forecast. That comes on the heels of other reports which showed a decline in consumer confidence but really strong housing numbers.

The big monthly unemployment report is Friday morning, with jobless claims out on Thursday morning. It's hard to get a handle on what they will say given the contradictory information we've been receiving as of late.

Earlier: For those who still don't believe cutting government spending will slow the economy probably never will, given that this morning's GDP report was led by a huge curb in defense spending.

The initial reading of gross domestic product for the U.S. came in at a negative 0.1 percent, the first drop in economic activity since 2009 and below the consensus of a 1 percent climb.

According to economists, much of it was due to a sharp decrease in military spending, Superstorm Sandy and the fiscal fight in Washington. Read more here.

Here's another take: "Frankly, this is the best looking contraction in GDP you'll ever see," Paul Ashworth, chief U.S. economist of Capital Economics wrote in a research note.

Here's another take: Yikes! Economy shrinks in fourth quarter

Here's another one, from the Wall Street Journal: The decline in federal spending was the largest drop since 1973. Spending at all levels of government fell 6.6% in the fourth quarter.

That strongly suggests that the sequester, which is set to begin cutting roughly $1.2 trillion of government spending - a large chunk in defense - would hurt the economy even more if it is enacted in the next few weeks as it is scheduled to. And another fiscal fight over the budget would likely do the same. Other economic data coming in recently about housing and consumer spending have been stronger than the economic consensus, but we remain on the economic razor's edge with the upcoming budget and fiscal fights.

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