From today’s Wall Street Journal (subscription required):
Recent economic data show that long before the fiscal cliff hits, federal spending already is falling—and taking a toll on the recovery. Federal spending and investment fell at an annual rate of 0.4% in the second quarter and has fallen 3.3% in the past year. Federal employment has fallen by more than 52,000 jobs in the past year and for the first time is lower than when the recovery began.
Such figures understate the full effect of the cuts, as lower federal spending hits military and civilian contractors and cuts into federally backed infrastructure spending at the state and local level. Taken together, the cuts are partially offsetting private-sector growth that, while slow, has been consistent.
The writer ignores the cuts in domestic discretionary spending, which have been even larger than the cuts in military spending. Still, add those federal cuts to the 600,000 in job cuts at the state and local level over the past two years, throw in similar fiscal austerity in Europe, and what you have is the single best explanation for why the economy has failed to return to a sustainable growth path more than four years after the housing bubble burst.
Two years ago, Republican radicals seized control of the House of Representatives and imposed a fiscal austerity that choked off a nascent recovery. If these same forces retain control of either house in the fall and Romney wins the White House, a double dip recession is inevitable. Plan your investment strategies accordingly.
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