Economy faltered in final quarter of '12

Key factors: falling exports, companies not restocking, cuts in defense spending

By Christopher S. Rugaber

Associated Press

Published: Wednesday, Jan. 30 2013 9:01 p.m. MST

Containers are unloaded from cargo ships at the Port of Los Angeles. The U.S. economy unexpectedly shrank from October through December.

Associated Press

WASHINGTON — The U.S. economy shrank unexpectedly late last year, a reminder of the biggest threat it faces in 2013: sharp government spending cuts and prolonged political budget fights.

Several factors helped push the economy into negative territory for the first time since mid-2009. The contraction in the October-December quarter came in at an annual rate of 0.1 percent, according to a government estimate released Wednesday.

The Commerce Department said the economy shrank last quarter mainly because companies restocked at a slower rate and the government slashed defense spending. Exports also fell.

Economists say some of those factors could prove temporary. Still, the slowdown from the 3.1 percent annual growth rate in the July-September quarter was unexpectedly sharp.

For all of 2012, the economy expanded 2.2 percent, better than 2011's growth of 1.8 percent.

The Federal Reserve referred to the fourth-quarter slowdown Wednesday in a statement after a policy meeting. The U.S. economy appears to have "paused in recent months," the Fed said, mainly because of temporary factors. The central bank said growth would likely resume this year. But it reaffirmed its commitment to stimulating the economy by keeping borrowing costs low for the foreseeable future.

Looming government cutbacks may already have hindered the economy: Concern over the year-end fiscal cliff could be one reason businesses slowed their restocking. And defense spending may have fallen as agencies prepared for automatic spending cuts. Congress managed to avert the fiscal cliff but only postponed the start of automatic spending cuts until March 1.

The drag from the government comes as private-sector growth is picking up. Consumers and businesses spent more in the October-December quarter compared with the July-September quarter.

Consumer spending, which drives about 70 percent of the economy, added 1.5 percentage points to growth last quarter. Business investment and home construction contributed, too.

But government spending cuts and slower company restocking, which can fluctuate sharply, subtracted a combined 2.6 percentage points from GDP. And a drop in exports subtracted an additional quarter-point.

Defense spending plummeted more than 22 percent, the steepest drop in more than 40 years. Nearly all those cuts were in services, such as weapons maintenance and personnel support. The Defense Department said spending fell in part because of the drawdown in forces from Iraq and Afghanistan.

The deal Congress reached with the White House to avoid the fiscal cliff delayed spending cuts of about $85 billion. Yet those cuts appear likely to take place eventually. Congressional Republicans see them as a way to force Democrats to make budget concessions.

At the same time, Americans are coming to grips with an increase in Social Security taxes that is leaving them with less take-home pay. The lower pay could cut roughly a half-point off growth this year, economists say. The automatic spending cuts, if they take place, could subtract an additional 0.3 percentage point, Marple estimates.

Everything from the National Park Service to federal law enforcement to health research would be affected. Social Security and veterans' benefits, along with other entitlement programs, would be exempt.

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