People look for post-Christmas sales at a shopping mall in Los Angeles, California on December 26, 2012. / ROBYN BECK AFP/Getty Images
The U.S. economy posted a decline of 0.1% at an annual rate last quarter, shocking experts although there was an expectation that growth would be lower than the 3.1% gain in the third quarter, the government said Wednesday.
It's the first decline in GDP since a -0.3% decline in 2009's third quarter. A survey of economists by Bloomberg had expected growth of 1% in the fourth quarter, held back by a plunge in defense spending and business inventories along with the impact of Superstorm Sandy, among other factors.
On an inflation-adjusted basis, GDP grew 2.2% in 2012 compared to 2011's 1.8%, the Bureau of Economic Analysis said Wednesday.
Growth has averaged less than 2.5% at an annual rate since the recession ended in mid-2009. That's below what many economists say is needed to create jobs and bring down unemployment quickly. The unemployment rate at 7.8% has fallen this year but is still well below what the Federal Reserve says is needed for it to stop or reduce its aggressive bond buying efforts aimed at stimulating growth.
"The things we thought might happen, happened, and they were worse than we thought,'' said Nigel Gault, chief U.S. economist at IHS Global Insight. ``There were two things: a huge decline in defense spending and a huge slowdown in inventory accumulation.''
The declines in defense and inventories subtracted up to 1.4 percentage points off the government's initial estimate of fourth-quarter growth, Gault said.
"This report should have an asterisk,'' said Gault.
Revised estimates for fourth-quarter GDP will be released by the Commerce Department on Feb. 28 and March 28.
Pointing to an increase in consumer demand and a gain in business investment, which was a drag on the economy in the third quarter, Gault said he is likely to raise his estimate of first-quarter growth in spite of the weaker-than-expected headline number.
Mark Zandi, chief economist at Moody's Analytics research firm, says he also plans to raise his growth forecasts for the first quarter of 2013 because he thinks business inventories will rebound. His upgrade, though, comes with the caution that first-quarter growth will be negatively affected by Washington's decision to end what had been a payroll tax holiday the past few years. Payroll taxes increased effective Jan. 1.
The fourth-quarter increases in consumer spending and investment are also signs that worries about the"fiscal cliff" did not slow the economy much in late 2012, he said.Several prominent economists had said this week that the number might come in above forecasts, after the government reported better-than-expected durable goods orders for December. Economists were quick to point out that this is the government's first take on GDP for the quarter and data that will be available later may significantly boost the number.
A sharp slowdown in defense spending and business inventories failed to offset respectable growth in consumer spending. Defense spending last quarter plunged 22.2% compared to an increase of 12.9% in the third quarter.
In 2012, GDP rose 2% in the first quarter at an annual rate, 1.3% in the second quarter with a 3.1% gain in the third quarter before the disappointing fourth-quarter decline.
The government will make its January jobs report on Friday. A report out Wednesday from a private-sector research group that is considered a precursor to the government's report showed the private sector adding 192,000 jobs this month. That's above December's gain of 185,000. Economists forecast the unemployment rate remained at 7.8%, unchanged from the previous two months.
The economy's prospects this quarter may hinge on how consumer spending is affected by this month's expiration of the Social Security payroll tax cut, which will reduce many Americans' take-home pay by about 2%.
A possible cautionary signal: Consumer confidence plunged in January for the third straight month, erasing all of 2012's gains, the Conference Board reported Tuesday.
Some economists are more optimistic about the full year's outlook, especially in the second half. The National Association of Business Economics said Monday that half the economists in its latest quarterly survey expect the economy to grow between 2% and 4% in 2013. Only 36% predicted that range of growth in the group's October survey.
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