The economy in the U.S. unexpectedly shrank in the fourth quarter, restrained by the biggest plunge in defense spending in four decades and dwindling inventory growth, as household purchases picked up.
Gross domestic product, the volume of all goods and services produced, dropped at a 0.1% annual rate, weaker than any economist forecast in a Bloomberg survey and the worst performance since the second quarter of 2009, when the world’s largest economy was still in the recession, Commerce Department figures showed today in Washington. A decline in government outlays and smaller gain in stockpiles subtracted a combined 2.6 percentage points from growth.
Bolstered by a drop in fuel prices and the biggest gain in incomes in four years, consumer spending accelerated as the biggest part of the economy overcame superstorm Sandy, a bitter presidential contest and Washington budget battles. The gain in spending may be difficult to sustain this quarter as a tax increase takes a bigger chunk from pay, one reason why Federal Reserve policy makers, meeting today, are projected to press on with plans to pump money into the world’s largest economy.
“The number isn’t as bad as it looks,” said Paul Edelstein, director of financial economics at IHS Global Insight in Lexington, Massachusetts, whose team projected a 0.3% gain, the lowest in the Bloomberg survey. “This really was a story about a payback in national defense spending. Consumer spending growth picked up, fixed investment was fairly strong.”
Stock-index futures fell after the report. The contract on the Standard & Poor’s 500 Index maturing in March fell 0.2% to 1,502.3 at 8:54 a.m. in New York.
Another report today showed companies took on more workers than projected in January, showing the labor market kept making progress at the start of the year. The 192,000 increase in employment, the most since February 2012, followed a revised 185,000 gain in December, according to figures from the Roseland, New Jersey-based ADP Research Institute.
The median forecast of 83 economists surveyed by Bloomberg called for a 1.1% gain in GDP. Projections ranged from 0.3% to 2.1%. The GDP estimate is the first of three for the quarter, with the other releases scheduled for February and March when more information becomes available.
For all of 2012, the economy expanded 2.2% after a 1.8% increase in the prior year.
Government outlays dropped at a 6.6% annual pace from October through December, subtracting 1.3 percentage points from GDP. The decrease was led by a 22.2% fall in defense that was the biggest since 1972, following the Vietnam War.
Inventories grew at a $20 billion annual rate, down from a $60.3 billion pace in the third quarter, today’s report showed. The slowdown cut GDP by an additional 1.3 percentage points.
A drop in sales overseas also slowed the economy last quarter. Exports fell at a 5.7% annual rate, the biggest decline since the first three months of 2009. That led to a widening of the trade gap that reduced GDP by another 0.25 percentage point.
“Most of the drag last quarter came from net trade and inventories, two of the traditionally most volatile and heavily- revised numbers, so we’re willing to overlook those,” Michael Gapen, a New York-based senior economist at Barclays Plc and former Fed economist, said before the report.
Today’s report showed household consumption climbed at a 2.2% rate, following a 1.6% advance from July through September and compared with the 2.1% median forecast in the Bloomberg survey. Purchases added 1.5 percentage points to growth.
Corporate spending on equipment and software climbed at a 12.4% pace, contributing 0.86 percentage point to growth. It had declined at a 2.6% rate in the previous quarter, the most in more than three years.
Residential construction increased at a 15.3% rate. For all of 2012, homebuilding climbed 11.9%, the most since 1992.
The report also showed price pressures remain contained. A measure of inflation, which is tied to consumer spending and strips out food and energy costs, climbed at a 0.9% annual pace compared with 1.1% in the prior quarter.
Later today, a statement from Fed policy makers at the end of their two-day meeting may say the central bank will continue its unprecedented balance-sheet expansion. The Federal Open Market Committee will renew its commitment after determining the benefits from the program exceed any risk of inflation or financial instability, according to economists surveyed by Bloomberg.
Retail sales grew more than forecast in the final month of the quarter, helped by job gains, rising house values and cheaper gasoline prices in addition to discounting by chains such as Macy’s Inc.
Automobile purchases also are spurring demand. Cars and light trucks sold at a 15.3 million annual rate in December after 15.5 million the prior month, the best back-to-back showing since early 2008, according to Ward’s Automotive Group.
Recent reports signal consumer confidence and spending may cool this quarter, in part due to changes in fiscal policy. Congress on Jan. 1 let the payroll tax revert to 6.2% from 4.2% while avoiding broad-based income tax increases. Lawmakers are now wrangling over spending reductions scheduled for March 1 that threaten to further slow the economy.
At the same time, sustained gains in housing, a rebound in business investment and a pickup in global growth that is benefiting companies such General Electric Co. will probably help underpin GDP.
General Electric’s fourth-quarter profit topped analysts’ estimates as demand in emerging markets fueled the aviation and health-care divisions, which helped build a record $210 billion order backlog for the Fairfield, Connecticut-based company.
“We saw real strength in the emerging markets and the developed regions stabilized,” Chief Executive Officer Jeffrey Immelt said on a Jan. 18 conference call. GE “entered 2013 with substantial momentum” following “solid order growth in five of the six businesses,” he said.
Capital spending stabilized toward the end of 2012. Caterpillar Inc., the world’s largest maker of construction and mining equipment, is among manufacturers expecting an improving outlook.
“In the United States, we’re becoming increasingly optimistic,” Michael DeWalt, a spokesman for Peoria, Illinois- based Caterpillar, said on a Jan 28 conference call with analysts. “We expect the U.S. housing industry to help the economy in 2013.”
Today’s report also reflected the effect of superstorm Sandy, which struck the East Coast in late October and caused widespread damage including shuttering businesses and destroying autombiles. Rebuilding efforts later in the quarter may have cushioned some of the blow, although the Commerce Department said it couldn’t quantify the effects.
Most of the slowdown in inventories last quarter was due to the hurricane, which severely disrupted supply chains and shut- in manufacturing activity, thus inhibiting producers from stockpiling goods, according to Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York.
Americans were able to finance their purchases in part due to a jump in incomes in December, as companies pulled dividends forward to avoid higher taxes in 2013.
“Household income spiked in December, as firms helped out their workers and shareholders by accelerating wages and salaries and by paying out large one-time dividends in December to avoid the higher taxes anticipated based on the fiscal cliff debate,” Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, wrote in a note before the report.