US Economy Shrinks in Q4 for First Time Since Recession

Andrew Klips |

NYSE Wall StreetThe US economy ground to a halt in the fourth quarter, according to a report released by the Commerce Department Wednesday morning, as companies scaled down inventories and the government cut spending in light of the fiscal cliff that was looming at the time.  On the bright side, total gross domestic product for the year – the widest barometer of the health of the nation – expanded more in 2012 than the year before, according to initial estimates.

Gross domestic product, to total of all goods and services produced in the nation, contracted by a 0.1 percent annual rate, following 3.1 percent in the third quarter, the first time the economy shrunk since the recession officially ended as 2009 came to a close.  Economists were expecting a much higher reading, calling-for a 1.0 percent annual rate.

Today’s estimate of GDP for the fourth quarter is still subject to a revision in February and another in March.

The Commerce Department attributed the sharp decline to businesses keeping lighter inventories of goods, fewer exports and large cuts in defense spending, while some economists speculate that Hurricane Sandy hitting the East Coast late in October played a role in sluggish growth.

Government spending on defense, a volatile category fell 22 percent in the latest quarter, after climbing 12.9 percent in the third quarter; adding to an overall 6.6 decline in government spending in the October to December period.

Helping offset those negatives for GDP, consumer spending grew by 2.2 percent in the latest quarter.  Consumer spending accounts for about 70 percent of the economy.  Also chipping-in was residential fixed investment, which surged by 15.3 percent in Q4 2012, its seventh straight month of expansion.

A statement from the White House warned that the latest GDP report should remind Congress “to act to avoid self-inflicted wounds to the economy,” referencing the political wrangling that lasted until the last second to avoid the fiscal cliff.

For all of 2012, the first estimate shows that US economy expanded at a 2.2 percent pace, up from 1.8 percent in 2011.

Increases in payroll taxes that were part of the short-term deal stuck in Congress to avert the fiscal cliff, sluggish global economies and the fact that a comprehensive budget still hasn’t been passed in Washington has economists still concerned about growth this year.  Most expect growth this year similar to 2012.

The market are showing little reaction to the GDP results, apparently digesting both the good with the bad, along with an optimistic report on private sector jobs from ADP.  Just before the lunch break, the Dow Jones Industrial Average is down just 6 points, the S&P 500 is off by 1 and the Nasdaq is flat.

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