Business World

Tuesday 2 September 2014

Markets rattled as US economy unexpectedly shrinks in fourth quarter

Lucia Mutikani

Published 31/01/2013 | 05:00

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THE US economy unexpectedly contracted in the fourth quarter, suffering its first decline since the recession ended more than three years ago as businesses scaled back on restocking and government spending plunged.

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The US economy shocked markets by shrinking 0.1pc in the fourth quarter of 2012 after growing 3.1pc in the third. The contraction was blamed on one-off factors including the steepest drop in defence spending since the early 1970s, uncertainty over the fiscal cliff and the hurricane that hit the east coast in November.

Shares dipped almost everywhere in the wake of figures that had been expected to show that the economy was still expanding.

Although economists were shocked by the contraction, many took encouragement from the resilience of US consumer spending.

Much of the fall in gross domestic product was due to a big reversal in business inventories and a plunge in federal defence spending – both highly volatile – which each knocked 1.3 percentage points off growth.

That suggests the underlying economy remains on a weak but stable growth path of 1pc to 2pc

The fourth quarter was the worst performance since the second quarter of 2009 and showed the world's biggest economy entering the new year with no momentum.

"You got a combination of inventories and defence which are taking more than 2 per centage points off the growth rate," said Nigel Gault, chief US economist at IHS Global Insight in Lexington, Massachusetts.

"This is not an indicator of recession."

Still, the contraction, coming against a backdrop of tightening fiscal policy, could create an urgency for policymakers to deal with outstanding budget issues.

Economists polled by Reuters had expected output to increase at a 1.1pc rate. None of the economists surveyed had predicted a contraction. A pick-up in consumer spending and a rebound in business investment curbed the slide in output and offered some hope for the recovery, which will be severely tested as Washington tightens its belt.

A second report showed that private employers stepped up hiring in January, suggesting an improvement in the labour market. An increase in job gains could help the economy to weather the headwinds in the first half of the year.

A drop in government spending inflicted the most damage, led by a 22.2pc fall in defence spending. Exports also declined, falling at an almost 6pc annual rate.

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