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Defense cuts blamed for first downturn in economy since 2009

The U.S. economy unexpectedly shrank from October through December, the first quarterly drop since 2009 and a reminder of the economy’s vulnerability as automatic cuts in government spending — including defense — loom.

The Commerce Department said the economy shrank at an annual rate of 0.1 percent mainly because the government cut defense spending and companies restocked at a slower rate.

The plunge in defense spending in the October-December quarter followed a jump in the third quarter. The fluctuation might have reflected higher-than-usual spending that occurred in the July-September period in anticipation of government spending cuts later in the year. Some defense contractors reported lower government spending at the end of the year.

Last week, General Dynamics blamed a $2 billion loss in the fourth quarter on “slowed defense spending.”

Dayton regional leaders and thousands of civilian workers at Wright-Patterson Air Force Base have braced for the potential effects of automatic spending cuts known as sequestration, beginning March 1, coupled with the March 27 expiration of a continuing resolution that has frozen federal spending at last year’s level — less than what was budgeted for fiscal year 2013.

The Department of Defense could begin to notify nearly 800,000 civilian employees in mid-February to prepare for the possibility of furloughs, or unpaid time off, of one day a week starting in April for the rest of the fiscal year which ends in September, officials have said. Wright-Patterson had more than 29,700 military and civilian employees as of 2011, the latest year for which figures are available. Of those, more than 16,500 were civilian employees.

Scott Koorndyk, Dayton Development Coalition executive vice president of economic development and operations, said less military spending has worried defense contractors in the region, although he’s unaware of any layoffs so far.

“Uncertainty in an economy is never a good thing and that certainly is what our economy is facing,” he said.

While uncertainty has slowed the economy, he didn’t see a long-term economic contraction ahead.

Regionally, Koorndyk said, businesses have replenished stocks, manufacturing hasn’t slowed, and the biomedical sector remained strong. But he said he could not comment on the impact of sequestration should it happen. “I’m not sure anybody can really measure that impact,” he said.

The Aerospace Industries Association has projected Ohio could lose about 40,000 jobs if massive defense budget cuts hit. Many of those jobs would be in the state’s aerospace sector, said Dan Stohr, an AIA spokesman in Roslyn, Va.

He wasn’t hopeful Congress and President Barack Obama would reach a deal to avert the fiscal crisis March 1.

The Pentagon has already agreed to absorb $487 billion in cuts over a decade prior to any sequestration reductions. “If sequestration is not avoided I expect us to go into a recession almost immediately,” Stohr said.

In preparation for spending cuts, Wright-Patterson announced Jan. 23 a civilian hiring freeze and will terminate the jobs of 344 temporary or contract employees who are not deemed mission critical. The base has curtailed travel, cut back on supply purchases, deferred maintenance and expected to review base service contracts to determine where to cut further.

Incomes up, hiring remains slow

For all of 2012, the economy expanded 2.2 percent, better than 2011’s growth of 1.8 percent. For 2013, analysts generally think the economy will grow at a steady if modest pace of roughly 2 percent as the housing and auto sectors continue to recover along with bank lending and consumer spending.

Exports fell by the most in nearly four years, a result of Europe’s recession and slower growth in China and some other large developing countries.

Incomes, though, jumped last quarter as companies paid out special dividends and bonuses ahead of expected tax increases in 2013. Commerce estimated that businesses paid nearly $40 billion in early dividends. After-tax income, adjusted for inflation, rose 6.8 percent, the most in nearly four years.

Subpar economic growth has held back hiring. The economy has added about 150,000 jobs a month, on average, for the past two years. That’s barely enough to reduce the unemployment rate, which has been a still-high 7.8 percent for two months.

The Associated Press contributed to this story.

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