Economy in U.S. shrinks as defense spending slumps

Government Outlays

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.

Consumer Pickup

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.

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