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U.S. economy shrinks for first time since 2009

By Christopher S. Rugaber

AP Economics Writer

LAST UPDATED: 05:28 a.m. HST, Jan 30, 2013

WASHINGTON » The U.S. economy unexpectedly shrank from October through December for the first time since 2009, hurt by the biggest cut in defense spending in 40 years, fewer exports and sluggish growth in company stockpiles. The drop occurred despite stronger consumer spending and business investment.

The Commerce Department said today that the economy contracted at an annual rate of 0.1 percent in the fourth quarter. That was a sharp slowdown from the 3.1 percent growth rate in the July-September quarter.

Economists said the drop in gross domestic product wasn't as bleak as it looked. The weakness was mainly the result of one-time factors. Government spending cuts and slower inventory growth, which can be volatile, subtracted a total of 2.6 percentage points from GDP.

But the fact that the economy shrank at all, combined with much lower consumer confidence reported Tuesday, may raise fears about the economy's durability in 2013. That's because deep automatic government spending cuts will cut into domestic and defense programs starting in March unless Congress reaches a deal to avert them.

And Americans are coming to grips with an increase in Social Security taxes that has begun to leave them with less take-home pay.

Still, the government spending cuts and slack inventory growth in the fourth quarter offset a 2.2 percent increase in consumer spending. And business spending on equipment and software rose after shrinking over the summer.

Consumer spending added 1.5 percentage points to GDP, and business investment added 1.1 points — both stronger contributions than in the third quarter.

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

And for all of 2012, the economy expanded 2.2 percent, better than 2011's growth of 1.8 percent.

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

Incomes, though, jumped last quarter as companies paid out special dividends and bonuses ahead of expected tax increases in 2013. Commerce estimated that businesses paid nearly $40 billion in early dividends. After-tax income, adjusted for inflation, rose 6.8 percent, the most in nearly four years.

Superstorm Sandy likely also dragged on growth by closing factories, disrupting shipping and shutting down retail stores. While the department did not specify its effects on GDP, it estimated that Sandy destroyed about $36 billion in buildings and other private property and $8.6 billion in government property.

Subpar growth has held back hiring. The economy has created about 150,000 jobs a month, on average, for the past two years. That's barely enough to reduce the unemployment rate, which has been 7.8 percent for the past two months.

Economists forecast that unemployment stayed at the still-high rate again this month. The government releases the January jobs report 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.

The biggest question going forward 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 percent. That 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.

Already, a key measure of consumer confidence plummeted this month after Americans noticed the reduction in their paychecks, the Conference Board reported Tuesday.

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palani wrote:
But...but...but that cannot be. Obama was reelected after rescuing us from economic ruin. And the unemployment rate is lower than that after his first coronation in 2008, even though some 8 million fewer Americans are employed now than then.
on January 30,2013 | 05:08AM
BluesBreaker wrote:
If you would take a moment to look beneath the headline, you'd see that it's actually pretty good news.

Reduced government spending was largely to blame for the drop

Government spending as a whole declined 6.6% in Q4 after rising 3.9% in the prior quarter. Defense spending fell 22%, the biggest drop since 1972. By contrast, defense spending was up 12.9% in Q3.

Consumer Spending Rose While Inventories Fell

Real personal consumption actually accelerated in the quarter, rising 2.2% versus 1.6% in Q3. Durable goods, often a sign of long-term consumer confidence, rose 13.9%. Inventories fell in the quarter, taking 1.27% off the GDP number after adding .73 in Q3. That suggests pent up production demand to restock,

When you look at the private sector performance and the business and consumer spending, that's pretty solid across the board and then consider the GDP number in the context of all other data, there's nothing to suggest a sustainable economic decline. I can't see the Fed changing course over a one-quarter aberration, especially considering the underlying positives.

on January 30,2013 | 06:13AM
Pacej001 wrote:
You remind me of the Monty Python sketch, "always look(ing) on the bright side of death". A green shoot in the land turned to desert is great news. Oh, sure. I hope it's so, on the other hand to overlook Palani's fact that we're still in the hole 8 million jobs since the exalted one took office, that the unemployment rate is really over 10% since so many have given up looking, that, if cuts in defense spending slow the economy, why wouldn't the oncoming wave of tax on the evil rich and Obamacare taxes, which also extract money from the private sector, do the same?
on January 30,2013 | 08:10AM
BluesBreaker wrote:
LOL! Good one. Touche
on January 30,2013 | 09:48AM
allie wrote:
Ummm...you cut government spending and it cuts economic growth. Always has been that way. It will happen again after the huge cuts to come in March. Nothing to do with Obama.
on January 30,2013 | 05:22AM
ahi1pfb wrote:
Has everything to do with Obama. Since he took office govt. has been using smoke and mirrors to hide the truth. We are not better off and will be even worst off when obamacare really kicks in. Millions of people have still not returned to work. Colleges are graduating many more citizens with no job opportunities for them. More people applying for welfare cuz their unemployment ran out. We are borrowing money to pay only the interest rate on our national debt. Surprise when the interest rates start to go up, and it will , the dollar will collapse and you think yourbama is the second coming. Auwe!
on January 30,2013 | 05:55AM
allie wrote:
not due to oBama. Economic stagnation for the middle class since Reagan.
on January 30,2013 | 07:10AM
Pacej001 wrote:
Did you miss the entire globalization thing, the rise of international competition? the gigantic increase in our international competition?
on January 30,2013 | 08:14AM
ahi1pfb wrote:
Here is what obamanomics has in store for you in 2013.http://xfinity.comcast.net/blogs/finance/2013/01/29/retailers-that-will-close-the-most-stores/?cid=hero_media
on January 30,2013 | 06:00AM
BluesBreaker wrote:
It's always Obama, right? It couldn't possibly be mismanagement or changing consumer taste or changing technology (e.g. Blockbuster). When the only tool you have is a hammer, everything looks like a nail.
on January 30,2013 | 06:16AM
ahi1pfb wrote:
No, when you demonize success and go after those who are successful it doesn't help any economy. And who suffers? Those who are working hard to become successful. You Obama sheep need to open your eyes.
on January 30,2013 | 06:33AM
BluesBreaker wrote:
There's a big difference between success and greed, just like there's a difference between a conventional bank loan and predatory lending. Wealth achieved through fraud, buying off politicians to change the rules in your favor (Amgen) and not virtues. Some businesses make a lot of money to the detriment of consumers (credit card companies, pay-day loan companies, for-profit schools), not merely to make a decent profit by providing them with goods and services.
on January 30,2013 | 09:52AM
ahi1pfb wrote:
Obama doesn't single out greedy business. He goes after all successful people. Class warfare is his tool. How can we improve the economy when the president is anti success.When almost half the people in the U.S. pay no income tax at all, It's no wonder the deficit is out of control. When you talk about fair share how bout people that pay no share. California will soon be bankrupt because of their tax the hell out of the rich ideology. I say flat tax everyone. If you don't like it, get off your okole and be more successful in life.
on January 30,2013 | 02:44PM
hawaiikone wrote:
Wow, despite constant demonizing of Bush you seem awfully quick to resent anyone doing the same to Obama. You'd better get ready for a lot more, this is just the tip of the ice burg.
on January 30,2013 | 06:46AM
allie wrote:
Bush left a terrible recession for Obama. Bush lied about Iraq and may have lied about 9-11
on January 30,2013 | 07:10AM
ahi1pfb wrote:
When the economy is bad in 2028 you'll still be blaming Bush allie. Yeah and wait, the Japanese didn't bomb Pearl Harbor Bushes grand father lied about that too.
on January 30,2013 | 08:18AM
Pacej001 wrote:
Cite proof of Bush's lies regarding WMD in Iraq. Two Senate Select intelligence committees, one run by the democrats couldn't do it. Washington DC leaks lied a sieve. If you were right, it would be out there and the democrats would have been all over it. And don't forget, the Clinton administration made essentially the same assessment of Iraq's WMD programs and ALSO advocated for regime change. To sum up, you're wrong.
on January 30,2013 | 09:53AM
Just like anything else in life-It is NEVER 1 thing that solves the problems. It is NEVER 1 thing that creates problems. It is a COMBINATION of multiple components that go into these problems, ideas, and solutions we seek every day. So, to believe any 1 person is responsible for our economic predicament is shortsighted and totally rediculous-stop bickering about whose fault it is and come up with solutions to the problems.
on January 30,2013 | 07:58AM
BluesBreaker wrote:
I didn't demonize Bush.
on January 30,2013 | 09:53AM
wondermn1 wrote:
It is Obama, The economy has been in a spinning decline since the welfare king has taken over. Why work when the money is free? Like BluesBroken who is on the Hawaii RAIL money pot list.. Wait until Obamacare hits and you will see the doctors close and the government will screw that up as well. Remember a government that is big enough to give you everything you need is also capable of taking everything you have.
on January 30,2013 | 06:54AM
Pacej001 wrote:
The "only tool" line fits ideologues on both the conservative AND progressive ends of the spectrum. It's hard to see Obama, objectively, as anything other than an extreme left wing ideologue, especially after his inauguration speech in which he professed to keep on doing what isn't working economically, only more of it, thus guaranteeing that the slowest recovery from recession since WWII only becomes slower.
on January 30,2013 | 09:48AM
Pacej001 wrote:
Obama proposed the sequester (Jack Lew's idea). It has everything to do with him and his refusal to deal with a debt and entitlement problem that even he said (and formed a commission to deal with) is "unsustainable".
on January 30,2013 | 08:12AM
saveparadise wrote:
The military is the backbone of our great country. Cut military spending and we lose jobs. Bring home the soldiers and we need more jobs. The balance is delicate.
on January 30,2013 | 07:44AM
BluesBreaker wrote:
Total B.S.
on January 30,2013 | 09:53AM
Pacej001 wrote:
Not so fast on gov't spending cuts as cause for the slowdown: There was no decrease in government spending during the fourth quarter of last year. In fact, the government spent more money between October and December of 2012 than it did during the previous two quarters. So federal spending actually increased during the 4th quarter. Federal outlays by quarter: 1st: 966,188 2nd: 884,957 3rd: 809,969 4th: 907,912
on January 30,2013 | 10:49AM
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