WASHINGTON (AP) — The U.S. economy unexpectedly shrank from October through December, the first quarterly drop since 2009 and a reminder of the economy’s vulnerability as automatic cuts in government spending loom.
The Commerce Department said the economy shrank at an annual rate of 0.1% mainly because companies restocked at a slower rate and the government slashed defense spending. Those trends partly reflected uncertainty late last year about the fiscal cliff, which Congress averted in a deal reached Jan. 1.
Economists say those factors could prove temporary, and the likelihood of another recession appears remote. Still, the sharp slowdown from the 3.1% annual growth rate in the July-September quarter, also driven by a drop in U.S. exports, raised concerns about 2013.
Congressional Republicans seem determined to permit deep cuts to defense and domestic programs to kick in as scheduled March 1. And Americans are coming to grips with an increase in Social Security taxes that has begun to leave them with less take-home pay.
Government spending cuts and slower company restocking, which can fluctuate sharply, subtracted a combined 2.6% points from GDP. Those two factors offset a 2.2% increase in consumer spending. And business spending on equipment and software rose after shrinking over the summer.
The Federal Reserve referred to the fourth-quarter slowdown in a statement after it ended a policy meeting Wednesday. The U.S. economy appears to have “paused in recent months,” the Fed said, mainly because of temporary factors. The Fed reaffirmed its commitment to stimulating the economy by keeping borrowing costs low for the foreseeable future.
For all of 2012, the economy expanded 2.2%, better than 2011′s growth of 1.8%. For 2013, analysts generally think the economy will grow at a steady if modest pace of roughly 2% as the housing and auto sectors continue to recover along with bank lending and consumer spending.
“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 research note. “The drag from defense spending and inventories is a one-off. The rest of the report is all encouraging.”
The plunge in defense spending in the October-December quarter followed a jump in the third quarter. The fluctuation might have reflected higher-than-usual spending that occurred in the July-September period in anticipation of government spending cuts later in the year. Some defense contractors reported lower government spending at the end of the year.
Last week, General Dynamics blamed a $2 billion loss in the fourth quarter on “slowed defense spending.”
Exports fell by the most in nearly four years, a result of Europe’s recession and slower growth in China and some other large developing countries.
Incomes, though, jumped last quarter as companies paid out special dividends and bonuses ahead of expected tax increases in 2013. Commerce estimated that businesses paid nearly $40 billion in early dividends. After-tax income, adjusted for inflation, rose 6.8%, the most in nearly four years.
Superstorm Sandy likely also dragged on growth by closing factories, disrupting shipping and shutting down retail stores. While the department did not specify Sandy’s effect on GDP, it estimated that Sandy destroyed about $36 billion in private property and $8.6 billion in government property.