Sandy Trail

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SummaryThe Q4 contraction is more due to disparate factors than any downturn in the American economy.

The US economy, expected to have a relatively comfortable growth of around 2% this year, contracted for the first time since 2009 by an annual rate of 0.1% in the last quarter of 2012. Does this mean that the US, like other rich-world economies of the eurozone and the UK, is headed for a double-dip recession? Perhaps not. For one, the figures by the Bureau of Economic Analysis, are an advanced estimate subject to revision—growth in 2012 Q3 was revised from 2% (the initial estimate) to 3.1%. In other words, there is a good chance that by February 28 (when the final report comes out), the results could be much more encouraging.

More importantly, however, the figure does not reflect any seething malaise in the American economy. Because the negative output growth comes laden with the effects of Hurricane Sandy, inventory depletion by businesses and stringent cuts in military spending, scheduled by Washington. Hurricane Sandy contributed to the lag by causing a total fixed-asset damage worth at least $44 billion, besides significantly halting trade. Otherwise, inventory depletion in the fourth quarter, as businesses began to sell of the excess $60 billion worth of inventories they had accumulated in the 3rd quarter, shaved off 1.27% of the growth. And lastly, contraction in defence spending, which plunged by 22.2% in the fourth quarter, took away 1.28% of the economic growth.

Meanwhile, indicators symbolising economy’s vitality remain relatively strong. Personal consumption increased by 2.2%, exhibiting brimming consumer-confidence, while the housing market too seemed to be rebounding with the residential fixed investment rising by over 15%. What’s more, the US economy added 192,000 jobs. Nevertheless, the negative effects of defence spending do show what could go wrong if the dreaded sequesters (from March 1) were to take effect. So, perhaps the biggest threat for the US is political dysfunction.

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