Wednesday, January 30, 2013 – 10:00 a.m.

The U.S. economy contracted at a rate of 0.1% in the 4th quarter of 2012 according to the Commerce Department. The unexpected drop follows a positive rate 0f 3.1% in Q3.

Amazingly, the drop is being blamed on cuts in defense spending. That’s right defense.

If a pullback in government spending caused this negative GDP number, then what lies ahead won’t be good.

Holiday activity was also apparently insufficient to carry the day.

What is center stage is just how much of a drag the payroll tax increase, that took effect January 1, will have on the economy in the current quarter and year. The increase has reduced pay for the average worker by approximately $100 per month.

It’s also expected that the January employment report, set to be released Friday morning, will show lackluster job growth.

The only silver lining in the economy has been the stock market, which as nearly recovered all of its losses suffered in 2008, courtesy of the U.S. Federal Reserve pumping trillions of dollars of liquidity into the economy.

It remains to be seen what will happen when that pump is turned off.