US economy surprisingly shrinks for first time in 3 years, decline seen temporary

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The U.S. economy shrank from October through December for the first time since the recession ended, hurt by the biggest cut in defense spending in 40 years, fewer exports and sluggish growth in company stockpiles. (Reuters) The U.S. economy shrank from October through December for the first time since the recession ended, hurt by the biggest cut in defense spending in 40 years, fewer exports and sluggish growth in company stockpiles. (Reuters)
SummaryUS economy shrank for first time since recession ended, hurt by biggest cut in spending in 40 yrs.

The US economy unexpectedly contracted in the fourth quarter, but analysts said there was no reason for panic given that consumer spending and business investment picked up.

Gross domestic product fell at a 0.1 percent annual rate, its weakest performance since the economy emerged from recession in 2009, the Commerce Department said on Wednesday.

If it were not for the hit from slower inventory growth and the deepest plunge in defense spending in 40 years, the economy would have grown at a respectable 2.5 percent rate. In addition, economists said Superstorm Sandy, which struck the East Coast in late October may have reduced GDP by about half a point.

"Obviously, the headline number is a bit jarring, but the underlying details of the report, by and large, are consistent with an economy that is growing probably at a trend basis of about two percent," said Michael Hanson, a senior economist at Bank of America Merrill Lynch in New York.

Economists polled by Reuters had expected GDP to rise at a 1.1 percent rate and none had predicted a contraction. While many were surprised by the drop in output, they were heartened by the acceleration in consumer spending and rebound in business investment, which pointed to some fundamental economic strength.

A second report, from payroll processor ADP, showed private-sector payrolls expanded by 192,000 jobs in January after increasing 185,000 in December, which also suggested the recovery's fundamentals were sound.

Faster jobs growth could help the economy weather the headwind of higher taxes and possible spending cuts. A payroll tax cut expired on Jan. 1 and big automatic spending cuts are set to take hold in March unless Congress acts.

Federal Reserve officials, at the end of a two-day meeting, noted economic activity had "paused" due to weather-related disruptions and other "transitory factors." They expressed confidence the recovery would regain speed with continued monetary policy support, and they left in place their monthly $85 billion bond-buying stimulus plan.

Economists say a growth pace in excess of 3 percent would be needed over a sustained period to significantly lower high unemployment. For the whole of 2012, the economy grew just 2.2 percent, and a report on Friday is expected to show the jobless rate held at 7.8 percent for a third straight month in January.

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