US economy shrinks 0.1 pct., first time in 3½ years; deep cut in defense spending key factor

US economy shrinks 0.1 pct., first time in 3½ years; deep cut in defense spending key factor

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, may raise fears about the economy’s durability in 2013. That’s because deep automatic government spending cuts will cut into domestic and defense programs starting in March unless Congress reaches a deal to avert them.

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http://www.washingtonpost.com/business/us-economy-shrinks-01-pct-first-time-in-3--years-deep-cut-in-defense-spending-key-factor/2013/01/30/9dc71c80-6ae1-11e2-9a0b-db931670f35d_story.html

Comments on Q4 GDP and Investment

by Bill McBride

The Q4 GDP report was negative, with a 0.1% annualized decline in real GDP, and lower than the expected 1.0% annualized increase. Final demand increased in Q4 as personal consumption expenditures (PCE) increased at a 2.2% annual rate (up from 1.6% in Q3), and residential investment increased at a 15.3% annual rate (up from 13.5% in Q3).

Investment in equipment and software rebounded in Q4 (increased at 12.4% annualized rate), and investment in non-residential structures was slightly negative.

The slight decline in GDP was related to changes in private inventories (subtracted 1.27 percentage points), less Federal Government spending (subtracted 1.25 percentage points), and a negative contribution from trade (subtracted 0.25 percentage points).

Overall this was a weak report, but with some underlying positives (the increase in PCE and private fixed investment). I expect the payroll tax increase to slow PCE growth in the first half of 2013 - and for additional government austerity - but I think the economy will continue to grow this year.

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http://www.calculatedriskblog.com/2013/01/comments-on-q4-gdp-and-investment.html