The Commerce Department reported that plunging defense spending and falling inventories combined to cause the U.S. economy to shrink for the first time since the recession ended in 2009 as GDP growth fell at an annual rate of 0.1 percent in the fourth quarter. For all of 2012, the economy expanded a modest 2.2 percent.
This is the first of three estimates for GDP growth for Q4 and it’s important to remember that there are often large revisions to the data between the first and second estimates, particularly for inventories. Nonetheless, this is not what markets or analysts were expecting as a Reuters poll of economists saw the growth rate coming in at 1.1 percent with not a single forecaster predicting a contraction.
Consumer spending contributed 1.52 percentage points to the growth rate but this was nearly offset by a negative contribution of 1.27 percentage points for the change in private inventories, part of gross private domestic investment, as manufacturers slowed production of goods.
Net exports subtracted 0.25 percentage points from growth, however, the biggest single reason for the overall contraction was a a sharp reduction in government spending that subtracted 1.33 percentage points from the growth rate, a whopping 1.27 percentage points coming from a dramatic decline in defense spending.
This comes at a time when it is increasingly likely that “sequestration” in early March will cause defense spending to be reduced even further.