US economy unexpectedly contracted in 4th quarter

The US economy unexpectedly reversed course in the final quarter of 2012 and contracted at a 0.1 per cent rate, the Commerce Department said Wednesday, its worst performance since the aftermath of the financial crisis in 2009.

The drop in gross domestic product was driven by a plunge in military spending, as well as fewer exports and a steep slowdown in the buildup of inventories by businesses. Anxieties about the fiscal impasse in Washington also contributed to the slowdown, one reason stockpiles grew more slowly.

Despite the overall contraction, there was underlying data in the report suggesting the economy is not on the brink of a recession or an extended slump. Residential investment jumped 15.3 per cent, a sign that the housing sector continues to recover, for one. Similarly, investment in equipment and software by businesses rose 12.4 per cent, an indicator that companies are still spending. Although economists expected output to decline substantially from the 3.1 per cent annual growth rate recorded in the third quarter, the negative number still caught Wall Street off-guard. It was the weakest economic report since the second quarter of 2009.
 

SHRINKING FORTUNES

• 0.1% Annual rate at which the GDP of US dropped in Q4
• 2.2% Rate at which economy expanded for all of 2012
• 6.6% Annual pace at which govt outlays dropped from October through December
• 22.2% Fall in defence spending, the biggest since 1972
• $20 billion Annual rate at which inventories grew, down from a $60.3-billion pace in the third quarter
• 5.7% Annual rate at which exports fell
  Source: Bloomberg

“I’m a little surprised,” said Michael Feroli, chief US economist at JPMorgan. “It grabs your attention when you have a negative number across everyone’s screens.”

Stocks were down only slightly in early trading on Wall Street, as some traders shrugged off the unexpected drop.

Feroli had been expecting growth to come in at 0.4 per cent, which was well below the 1.1 per cent consensus among economists on Wall Street. Like some other observers, Feroli said there were hints the economy was performing slightly better than the headline number suggested.

The 22.2 per cent drop in military spending — the sharpest quarterly drop in more than four decades — along with the drop in inventories and exports overwhelmed more positive indicators in the private sector, he said.

For example, final sales to private domestic purchasers, which strips out government spending as well as trade and inventories, rose by 2.8 per cent. “Consumers and businesses kept spending at a pretty steady pace,” Feroli said. “There was a lot of noise that moved the headline around.” For the entire year, the economy grew by 2.2 per cent, a slight improvement from the 1.8 per cent annual rate in 2011.

But with unemployment stubbornly high at 7.8 per cent and growth expected to remain slow in the first quarter, the poor report Wednesday was likely to set off more finger-pointing in Washington.

The compromise between President Obama and Congress earlier this month allowed a temporary cut in Social Security taxes to expire, which is expected to crimp growth in the first quarter. The change will cost a worker earning $50,000 a year an extra $1,000 annually.

Indeed, a consumer confidence survey released Tuesday by the Conference Board showed a sharp downturn in January, which economists attributed in part to financial anxiety arising from the reduction in take-home pay.

©2013 The New York Times News Service