The U.S. Commerce Department announced today that the nation’s gross domestic product (GDP) for the fourth quarter of 2012 shrank, falling by 0.1 percent. This was a significant downgrade from previous quarters and the number is far below the estimates of many economists, who forecasted a minimum of 1.1 percent expansion. According to Bloomberg News, defense spending cuts and a slackening in retail inventory growth contributed to the fall.
Government expenditures slid by approximately 1.33 percent during the fourth quarter, accounting for the majority of the decline. Inventories declined 1.27 percent while exports, which rose by 0.27 percent last quarter, were down 0.81 percent.
There were some bright spots in the data, however. Personal consumption was up by 1.52 percent compared to 1.12 percent in the third quarter of 2012. Similarly, fixed investments – which grew by a paltry 0.12 percent last quarter – rose by 1.19 percent.
“The number isn’t as bad as it looks,” Paul Edelstein, a senior economist at IHS Global Insight, an equity analytics firm based in Lexington, Massachusetts, told Bloomberg in an interview. “This really was a story about a payback in national defense spending. Consumer spending growth picked up, fixed investment was fairly strong.”
At this time, it’s difficult for investors to predict how the first quarter of 2013 will play out. The expiration of the payroll tax holiday as part of the fiscal cliff deal and the anticipated cuts from sequestration could provide additional drag on economic growth, potentially sowing the seeds for a brief recession.
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