The US economy reversed more than three years of growth and fell 0.1 percent in the fourth quarter of 2012. The drop was driven, in part, by sharp declines in defense spending that some expect will be temporary.
Like a bolt out of the blue, the US economy suddenly pitched into reverse last quarter after 13 straight quarters of growth.
America’s gross domestic product fell at an annual rate of 0.1 percent in the fourth quarter, the Commerce Department reported Wednesday. But the decline in GDP looks to be attributable to one-time factors rather than a signal of an oncoming recession, some economists say.
A surprisingly sharp reduction in federal spending on defense for the quarter, coupled with a reduction in private-sector inventory buildup, combined to exert a slowing effect on the economy that was equal to about 2.5 percent of GDP, on an annualized basis.
That was enough to drag overall GDP down, even as residential construction improved and consumer spending – typically the economy’s driving force – continued to rise.
Forecasters interpret the fourth quarter’s negative forces as largely temporary. Defense spending, for example, can be volatile but doesn’t generally fall at such a sharp rate.
Alan Krueger, who chairs President Obama’s Council of Economic Advisers, said in a White House blog post that the plunge in defense spending – a 22 percent annualized rate, the largest quarterly decline in 40 years – was “likely due to uncertainty” about the possible imposition of automatic spending cuts by Congress, now scheduled to take effect on March 1.
Also, this is the Commerce Department’s first estimate of the quarter and is subject to revision as more complete data come in.
“I’d be quite surprised if we ended up with a negative quarter,” said Mark Zandi, chief economist of Moody’s Analytics, in a conference call with reporters on Wednesday. “I don’t think the reality of the economy has changed.”
Some economists, moreover, say the economy in 2013 could get a first-quarter boost thanks to the year-end weakness, as corporations rebuild inventories.
“We believe today’s report suggests upside risk to our forecast of 1.0% for Q1 GDP,” writes Michelle Meyer, senior US economist at Bank of America Merrill Lynch.
An economy growing at 1 percent, of course, isn’t exactly one for the record books.
One reason for the expected tepid growth in the first quarter is the expiration of payroll-tax breaks in the new year, leaving US workers with about 2 percent less take-home pay.
And beyond the year’s first three months, the economy also faces hurdles related to fiscal policy. A key one is the “sequester” spending cuts set to begin in March. Some economists expect that Congress will find a way to agree on modest spending reductions that would slow but not strangle GDP growth. The full impact, if sequestration takes effect, could drag the rate of GDP growth down by as much as 1 percent, annualized, in the second and third quarters, according to one estimate by Goldman Sachs.
Still, most forecasters say the economy’s overall trajectory is upward. Consumer spending has been rising at about a 2 percent pace, and the housing-market recovery is expected to continue.
That makes many forecasters optimistic that the pace of growth will pick up as the year goes on.