High stakes political games to blame for contracted economy?

>>> yesterday the commerce department reported that the u.s. economy shrank for the first time in three and a half years. down .1%. amid the kind of gloom, economists weren't screaming fiscal armageddon. many said the report had mainly good news. the top analyst at capital economics wrote, "rankly, this is the best-looking contraction in gdp you'll ever see. it definitely doesn't indicate that the economy is plunging headlong into another recession." barclays wrote "we would suggest caution in reading the very weak headline gdp number as a true loss of momentum." this positive outlook is perhaps because of the drivers of the contraction were largely avoidable. the defense department was cut by more than 22%. the largest drop in 40 years. mad, companies were slower to restock their shelves. likely due to uncertainty surrounding the fess cal cliff. these two areas caused a combined 2.6% drop in gdp , and consumer spending which accounts for 70% of the u.s. economy and is a barometer of economic health rose by 1.5%. fixed investment and things like housing also rose more than a percent. the white house is using the occasion to illustrate the dangerous effects of high stakes political games and looming spending cuts.

>> talk about letting the sequester kick in, as though that were an acceptable thing belies where republicans were on this issue not that long ago, and it makes clear, again, that this is political brinksmanship of the kind that results in one primary victim, and that's american taxpayers, the american middle class .

>> and house republicans are using the occasion to illustrate the dangerous effects of high stakes political games and looming spending cuts. said house majority whip kevin mccarthy , today's report by the commerce department is a stark example of how political games in washington have real consequences on the lives of american families. joining the pam now is rona, assist wrant managing editor of time making sfwleen, and from washington the man with all the answers, cnbc 's amman javers. i'm going to start with you. it seems, as usual that, we have a tomato-tomatoe conundrem on our hands. you would think this would weaken the argument made by the white house . on the other hand, it might strengthen their hand going into the debate over see quick rags? what is your debate?

>> no matter how good-looking a contraction is, you still don't want to look at it. let's get past this idea this is the best looking contraction we've seen. it's a contraction, and that's never a good thing in economic terms. you don't want to see that. you're right. look, this number has aspects to it that give both sides the willies. the democrats don't like the headline number. they don't really want to talk about a contraction on president obama 's watch. republicans aren't really comfortable with the idea that austerity -- that these big huge defense cuts and government spending cuts that we've seen can have a drag affect on the gdp going into the see sequester debate. both sides are uncomfortable with this number, and that's why we probably won't see it discussed for more than a news cycle or two. then we'll move on.

>> affect show it's a kabarb.

>> this is the very last time anybody will talk about this number in washington right here.

>> we're making history .

>> right.

>> rona, the, sequestration debate, armageddon, whatever you want to call it, has been tossed around in a variety of different fashions, especially on the right because initially it was seen -- we cannot do this. defense cuts disproportionately hurt the gop , and, yet, now there is sort of maybe the sense that they will let sec west rags go ahead. mr. boehner says he has significant republican support, including gop defense hawks, on the side of letting the gop work. i got that in my back pocket. the speaker.

>> well, you know, i'm going to go back to the chart that you showed the beginning of the segment here. this really is not a bad place for cuts to happen, and it's not a bad place to have a contraction, and, by the way, no serious economy it's is saying that we're going to go into a recession this year. i mean, the underlying economy is still pretty good, as you said. 70% consumer spending . consumer spending has been pretty robust. by the way, that's down to the fed, which has been propping up asset prices for the last few years. stocks, bonds, real estate , et cetera . so long the housing market is still up, construction is still up, and have you these underlying things coming look, we're going to be fine. i think the jobs numbers tomorrow will be interesting, and that's fwb toe telling, but i don't think that this is a contraction that's going to last the rest of the year. i would make the point, though, that cuts to any kind of government spending have an impact.

>> right.

>> it's interesting. i just came last week from world economic forum in davos in switzerland, and there the story --

>> you have all the answers for us.

>> i have no answers, but i did a lot of talking. there was no action whatsoever. but the story there was really, you know, europe is just so beleaguered still because they've been following a program of cuts and austerity that isn't working, and that's a message that we really need to remember here at home.

>> it's the -- jonathan, one of your colleagues at new york magazine has a great metaphor for this. he says the positive take on the economy is sort of like saying the knicks were winning by 20 points last night and they only lost because their assistant coach took over and decided play the rest of the game with just three players. that sounds comforting except the same assistant coach is still there, and he keeps saying his play three guy strategy will work.

>> i love working in sports metaphors whenever possible. sfli feel most comfortable working in them.

>> what he is saying in less colorful words is that though the election settled some things, obama is still president, there is still a tremendous muddle we're dealing with in washington that has a drag on the economy, while the economy, in large part, things seem to be moving in the right direction. there's still a lot of things that have to get solved in washington to propel it in the right direction. these numbers maybe in the specifics people weren't sure bshg but if you talk to mayors as i do regularly, as you talk to business leaders in new york and elsewhere, the fact that it was going to be a roughened of 2012 was no surprise.

>> right. exactly.

>> we've left out one important metric here, which is how did the markets react? the markets don't care. we're just still cruising up in a 14,000 accident practically dow jones index , and to the degree we care what the equities markets think of a slight contraction, they seem sanguin.

>> it's true the markets are going up, but they are because the fed has been saying we're going to keep throwing money into the bond market . we're going to buy up mortgage-backed securities. that raises all asset prices. that doesn't change the underlying growth dynamic in this country, and at some point those lines enter sect. at some point unless you have real growth in the economy, corporations can't keep making money .

>> the markets are off because of corporate profits chshgs are doing spectacularly well.

>> they're starting to contract. they have done very well for the last three or four years, but this last quarter, we've seen the first contraction. i actually think that we're at that crossing point soon.

>> i have to ask you, in addition to calling attention to the immunity or lack thereof in the markets , visa vi the fiscal cliff, and whether or not we actually all going to be living under one version of the fiscal cliff for the foreseeable future, which is a terrifying concept. not a trustworthy source, andrew ross sorkin.

>> wait a second. he works for cnbc , you snn.

>> he does?

>> yeah.

>> i'm kidding. the thing about today is that it does take the message off of the white house talking points and the issues at the moment, which are immigration and gun control. reince priebus has said priorities are backwards. now, agree generally or disagree with reince preibus, it does bring the conversation back to jobs, and that's not something the president habz talking about.

>> the white house sort of had the economy in this box after the election where everyone sort of assumed that it was a tepid roer, but it was a recovery over the next four years. things would probably improve over the course of obama's term. this number calls that into question, and that's not good for the white house . they were ready to move on to some of these legacy issues. they wanted to talk about twunz. they wanted to talk about immigration. they don't want to go back and refight the fights of 2009 and 2010 all over again, so for them this is a real unwelcome distraction and for republicans it's an opportunity to poke the president m nose, which is something they enjoy doing. the question is does it change anything politically in washington , and here's why i think this is important. i don't think that it does, or at least not yet. i think we're still cruising toward the opportunity for both sides to link arms and jump over the sequester cliff on march 1 it's. i think the politics of that are getting increasingly likely as both sides say, hey, you know what, we can live with these spending cuts. we'll do it. it will be a drag on gdp , but not that much. we're prepared to have these cuts. republicans want the win, and democrats don't necessarily want to fight all over again on this and maybe threaten something on the debt ceiling, which for them would be worse.

>> one of the things that hasn't changed since the republicans saying these job numbers are terrible. we're going to keep cutting medical they get even worse .

>> so in terms of the big battle and any kind of possible grand bargain, you think that's over continuing resolution and budget numbers?

>> yeah. well, i mean, the first thing that comes up time-wise, is on march 1st we have to deal with the sequester because the republicans reordered the way that these things are going to fall on the calendar. the sequester is those automatic spending cuts. billions -- tens of billions of dollars just this year in spending cuts. the republicans would like to have some kind of spending cut win this year, and that might be their only opportunity to get one, so you can see them hunkering in and saying, you know, we're going take the hit on defense spending cuts, but we're going to get spending cuts here by hook or by crook, and for democrats they might say, you know, we would rather lose this fight than have to do this all over again when it comes time to deal with the debt ceiling the next time, so let's lose here gracefully and then not lose on the debt ceiling where the outcome could be more disastrous for markets if we don't have a debt ceiling increase. if you have a sequester, it's going to be a problem for gdp over the course of the year. it's not going to be an immediate problem, i don't think, for markets if the government says, hey, we're going to cut tens of billions of dollars of spending right away.

>> losing gracefully. what a concept. a concept. a concept. cnbc 's amman javers.

>> i'm great at losing gracefully.