US Economy Shrinks Unexpectedly

US Economy Shrinks Unexpectedly

The United States economy unexpectedly shrank at an annualised rate of 0.1 per cent in the fourth quarter of 2012, initial official estimates indicate.

The world’s largest economy grew 3.1 per cent in July to September.

The fourth quarter period was dominated by the “fiscal cliff” — the spending cuts and tax rises that had been due to come into force from 1 January.

These were avoided by a last-minute deal between the Republican-dominated Congress and the White House. However, economists warned at the time that fears of an abrupt cut in government spending were undermining business and consumer confidence.

However, part of that deal includes tax rises for the highest-earning Americans and — more significantly for the economy — the expiry of a payroll tax holiday for all US employees, something which is widely expected by economists to further weigh on growth during the current quarter.

The fourth-quarter shrinkage in economic output comes as a shock to analysts on Wall Street, who had been expecting 1.1 per cent growth according to a poll by news agency Reuters. Not one economist surveyed had predicted an economic contraction.

It will add to pressure on the US Federal Reserve to do more to stimulate the economy. Members of its Federal Open Markets Committee are due to announce the conclusions of their latest policy-setting meeting later on Wednesday, and will have had an advance look at the economic data.

Growth was dragged down by a 22 per cent cut in the federal government’s defence spending — the biggest since 1972, when the US was winding down from the end of the Vietnam War — and by the decision of many businesses to halt the rapid rebuilding of their inventories that began over the summer.

These two relatively volatile components of the data subtracted a combined 2.6 percentage points from the overall growth figure.

Consumer spending did pick up, as did business investment, suggesting that the economy may have some underlying momentum. Sales of computers and cars both made positive contributions to the economy’s performance.

Residential investment also grew 15 per cent, adding to evidence that the housing market has finally turned the corner.

“Frankly, this is the best-looking contraction in US [gross domestic product] you’ll ever see,” said Paul Ashworth, an economist at Capital Economics, in a note to clients. “The drag from defence spending and inventories is a one-off. The rest of the report is all encouraging.”

The October-to-December period was also negatively affected by Storm Sandy, which caused the closure of many factories and businesses in the New York area, and by a sharp drop in exports.

Growth for 2012 as a whole came in at 2.2 per cent, up from 1.8 per cent in 2011.

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