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

Jan 31 2013, 10:44 IST
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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 Fed's commitment to loose monetary policy pushed the dollar to a 14-month low against the euro. Prices for U.S. Treasury debt rose marginally, while stocks on Wall Street fell.

INVENTORY DRAG

In the fourth quarter, the recovery had to deal with uncertainty over the so-called fiscal cliff of scheduled tax hikes and budget cuts, which hurt confidence even though households and businesses seemed to shrug off the worries.

Businesses, caught with too much inventory on their hands in the third quarter, slowed their stock building in the final three months of the year. That slowdown reduced GDP growth by 1.27 percentage points, the most in two years.

But with the pick-up in consumer spending in the fourth quarter, businesses now will need to replenish stocks, which should help lift growth early this year.

"Today's number actually leaves the economy relatively well-positioned heading into the first quarter," said Michael Feroli, an economist at JPMorgan in New York.

The GDP report showed government spending tumbled at a 6.6 percent rate, with defense outlays plunging at a 22.2 percent pace, the largest drop since the third quarter of 1972.

Defense spending is on a downward trajectory as the government winds down two wars, but it had jumped in the third quarter, setting up for a larger-than-normal decline in the final three months of the year.

Trade also cut into the economy, slicing a quarter of a percentage point off the change in GDP. Exports, which have been hampered by a recession in Europe, a cooling Chinese economy and storm and strike-related port disruptions, fell for the first time since the first quarter of 2009.

Caterpillar Inc, the world's largest maker of construction equipment, on Monday reported a sharp drop in quarterly profits, citing weak demand in China as one reason for the decline.

PLENTY OF POSITIVES

There were several bright spots in the GDP report. For one, household income after taxes and inflation increased at a strong 6.8 percent rate. That allowed households to step up their saving, and the saving rate rose by more than a percentage point. Consumers were also helped by slowing inflation.

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