WASHINGTON: The U.S. economy unexpectedly shrank from October through December for the first time since 2009, hurt by the biggest cut in defense spending in 40 years, fewer exports and sluggish growth in company stockpiles. The drop occurred despite stronger consumer spending and business investment.
The Commerce Department said Wednesday that the economy contracted at an annual rate of 0.1 percent in the fourth quarter. That was a sharp slowdown from the 3.1 percent growth rate in the July-September quarter.
Economists said the drop in gross domestic product wasn’t as bleak as it looked. The weakness was mainly the result of one-time factors. Government spending cuts and slower inventory growth, which can be volatile, subtracted a total of 2.6 percentage points from GDP.
But the fact that the economy shrank at all, combined with much lower consumer confidence reported Tuesday, could raise fears about the economy’s durability in 2013. That’s because deep automatic government spending cuts will hit domestic and defense programs in March unless Congress reaches a deal to avert them.
And Americans are coming to grips with an increase in Social Security taxes that leaves them with less take-home pay.
“Frankly, this is the best-looking contraction in U.S. GDP you’ll ever see,” Paul Ashworth, an economist at Capital Economics, said in a note to clients. “The drag from defense spending and inventories is a one-off. The rest of the report is all encouraging.”
Ken Mayland of ClearView Economics in Pepper Pike said in a note to clients that the economy came to a standstill the last three months of 2012.
The bright spot was a strong performance by housing, Mayland wrote. “This is a trend that now has legs,” he said.
But in a time of deficit and debt budget constraints, the expansion of government entitlement payments will crimp spending on goods and services, Mayland wrote.
“The secret sauce for this economy is consumer spending,” he said.
The lack of solid job formation is causing poor income generation, he said. “Clownish” Washington politics also has taken a toll on the economy, he said.
Alan Tonelson, research fellow at the U.S. Business and Industry Council in Washington, D.C., and a frequent visitor to Northeast Ohio manufacturers, noted that the figures released Wednesday will be revised.
But he said they show America is “becoming increasingly dominated by personal consumption and housing — the toxic combination whose expansion inflated the last decade’s disastrous bubble.”
On the positive side, business investment returned as a growth engine in the quarter, Tonelson said.
For all of 2012, the economy expanded 2.2 percent, better than 2011’s growth of 1.8 percent.