Shock figures reveal US economy contracted in final quarter of 2012

Economy has been damaged by the biggest cut in defence spending in 40 years, fewer exports and sluggish growth in company stockpiles

Is this the fall out from the fated fiscal cliff?

America's economy contracted in the last quarter of 2012, defying widespread sentiment among economists - most recently gathered in Davos - who were optimistic about the prospects for recovery.

Damaged by the biggest cut in defence spending in 40 years, fewer exports and sluggish growth in company stockpiles, the contraction is a blow to confidence far beyond Washington.

The decline is the first since the recession ended and occurred despite faster growth in consumer spending and business investment.

The US Commerce Department confirmed that its economy contracted at an annual rate of 0.1 per cent between October and December last year – the first contraction since the second quarter of 2009.

The decline contrasts with a growth rate of 3.1 per cent in the third quarter of 2012.

Economists said the surprise decrease in US gross domestic product might not be as bad as it sounds, with the weakness primarily the result of one-off factors.

“Frankly, this is the best-looking contraction in US. GDP you'll ever see,” Paul Ashworth, an economist at Capital Economics, said in a note to clients. “The drag from defence spending and inventories is a one-off. The rest of the report is all encouraging.”

Another positive aspect of the report is that, overall in 2012, the economy expanded 2.2 per cent, 0.4 per cent better than 2011's growth of 1.8 per cent.

Exports fell by the most in nearly four years, likely a result of recession in Europe and slower growth in China and other large developing countries.

The economy is likely to remain weak in the first quarter of 2013 as Americans come to grips with an increase in Social Security taxes that has left them with less take-home pay.

Additionally, subpar growth has held back hiring. The US economy has created about 150,000 jobs a month, on average, for the past two years, which is barely enough to reduce an unemployment rate stuck at 7.8 per cent for the past two months.

Economists forecast that unemployment stayed at that rate again this month, with the US government releasing January jobs figures on Friday.

The slower growth in stockpiles comes after a big jump in the third quarter. Companies frequently cut back on inventories if they anticipate a slowdown in sales. Slower inventory growth means factories likely produced less.

Heavy equipment maker Caterpillar, Inc. said this week that it reduced its inventories by $2 billion in the fourth quarter as global sales declined from a year earlier.

An important future factor in the US economy is how consumers react to the expiration of a Social Security tax cut. Congress and the White House allowed the temporary tax cut to expire in January, but reached a deal to keep income taxes from rising on most Americans.

The tax increase will lower take home pay this year by about 2 per cent., which means a household earning $50,000 a year will have about $1,000 less to spend. A household with two high-paid workers will have up to $4,500 less.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Tradewind Recruitment: English Teacher

Negotiable: Tradewind Recruitment: My client is an excellent, large partially ...

Tradewind Recruitment: Science Teacher

£90 - £140 per day: Tradewind Recruitment: I am currently working in partnersh...

Tradewind Recruitment: Year 3 Primary Teacher

£100 - £150 per day: Tradewind Recruitment: Year 3 Teacher Birmingham Jan 2015...

Ashdown Group: Lead Web Developer (ASP.NET, C#) - City of London

£45000 - £50000 per annum + Excellent benefits: Ashdown Group: Lead Web Develo...

Day In a Page

Isis hostage crisis: The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power

Isis hostage crisis

The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power, says Robert Fisk
Missing salvage expert who found $50m of sunken treasure before disappearing, tracked down at last

The runaway buccaneers and the ship full of gold

Salvage expert Tommy Thompson found sunken treasure worth millions. Then he vanished... until now
Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Maverick artist Grayson Perry backs our campaign
Assisted Dying Bill: I want to be able to decide about my own death - I want to have control of my life

Assisted Dying Bill: 'I want control of my life'

This week the Assisted Dying Bill is debated in the Lords. Virginia Ironside, who has already made plans for her own self-deliverance, argues that it's time we allowed people a humane, compassionate death
Move over, kale - cabbage is the new rising star

Cabbage is king again

Sophie Morris banishes thoughts of soggy school dinners and turns over a new leaf
11 best winter skin treats

Give your moisturiser a helping hand: 11 best winter skin treats

Get an extra boost of nourishment from one of these hard-working products
Paul Scholes column: The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him

Paul Scholes column

The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him
Frank Warren column: No cigar, but pots of money: here come the Cubans

Frank Warren's Ringside

No cigar, but pots of money: here come the Cubans
Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

Isis stands strong as its numerous enemies fail to find a common plan to defeat it

The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

Virtual reality: Seeing is believing

Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
Homeless Veterans appeal: MP says Coalition ‘not doing enough’

Homeless Veterans appeal

MP says Coalition ‘not doing enough’ to help
Larry David, Steve Coogan and other comedians share stories of depression in new documentary

Comedians share stories of depression

The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
Has The Archers lost the plot with it's spicy storylines?

Has The Archers lost the plot?

A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
English Heritage adds 14 post-war office buildings to its protected lists

14 office buildings added to protected lists

Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Scientists unearthed the cranial fragments from Manot Cave in West Galilee