bar graphNew data from the U.S. Commerce Department has confirmed that the U.S. economy shrank during Q4 2012 as defense spending took record cuts, exports were slashed, and company stockpiles grew only slowly. Even as consumer spending and business investment rose, the economy contracted at an annual rate of 0.1 percent, a remarkable slowdown compared to the 3.1 percent growth rate that occurred in Q3. The decline in gross domestic product may not be as dire as it seems however, say some economists, as they say the sluggishness was due mainly to one-time factors such as slow inventory growth and government spending cuts which accounted for a 2.6 percent loss in GDP.

However, along with recently reported weakening consumer confidence, any economic shrinkage may spur fears of a renewed recession if automatic government spending cuts are not averted in March. American workers are also just recently coming to terms with the Social Security tax increase. The economic news was not all bad, despite the predicated one-time GDP contraction.

Consumer spending accounted for a 1.5 percent growth to the GDP while business investment added an additional 1.1 percent to data points that were stronger than in Q3. Also, the economy grew at an overall 2.2 percent annual rate for all of 2012 compared to 1.8 percent in 2011. Income also experienced a jump as many companies acted pay out bonuses ahead of the tax increases.

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


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