U.S. Economy Unexpectedly Contracts in Fourth Quarter

Source: WSJ.com
By ERIC MORATHSARAH PORTLOCK and KATHLEEN MADIGAN

WASHINGTON—U.S. economic momentum screeched to a halt in the final months of 2012, as businesses pared back inventories and government spending fell sharply, while lawmakers struggled to reach a deal on tax increases and budget cuts.

The nation’s gross domestic product shrank for the first time in three and a half years during the fourth quarter, declining at an annual rate of 0.1% between October and December, the Commerce Department said Wednesday.

It’s the first time the broad measure of all goods and services produced by the economy contracted since the post-financial crisis recovery began. Economists surveyed by Dow Jones Newswires had expected a 1.0% annualized growth.

The economy reversed from a 3.1% pace in the third quarter largely because federal government spending fell by 15% and private business inventories also decreased. Those drags and others were too much for solid consumer spending to overcome.

Still, for all of 2012, the gross domestic product advanced 2.2%, an improvement compared with 1.8% growth in 2011.

Economic output had expanded for 13 consecutive quarters, but improvement during the summer months was likely derailed by Washington policy makers’ inability to strike a comprehensive deal over pending tax hikes and spending cuts until the last minute.

Congress and the White House reached an agreement to avoid the worst of the fiscal cliff earlier this month, but economists have said payroll-tax increases and continued worries about delayed budget tightening are likely to drag on the economy early this year.

The decline in federal spending was the largest drop since 1973. Spending at all levels of government fell 6.6% in the fourth quarter.

The change in inventories, an often volatile category, subtracted 1.27 percentage points from fourth quarter GDP after adding 0.73 points to third quarter growth.

Real final sales—GDP less changes in private inventories—increased 1.1% in the fourth quarter, compared with a 2.4% gain in the prior period.

Trade was also a drag on the economy, as exports fell 5.7% during the quarter.

There were some bright spots.

Despite the uncertain prospects, Americans opened up their wallets during the holiday shopping season. Personal consumption expenditures advanced 2.2%, compared with 1.6% in the third quarter.

The housing market continued to be a positive contributor as well. Residential fixed investment, which includes spending on home improvements, grew by 15.3% in the fourth quarter and was the seventh consecutive gain.

Business investment also grew steadily, rising 8.4%, despite the uncertainly about U.S. fiscal policy.

Superstorm Sandy, which struck the Northeast in late October, likely impacted fourth quarter output as well, but the Commerce Department was not able to provide an estimate of its effect on GDP. Other data have suggested Sandy slowed factory production, increased layoffs and shuttered some retail outlets in the weeks after the storm, but rebuilding efforts likely added growth later in the time period.

The Commerce Department did estimate that Sandy destroyed $35.8 billion in private assets and $8.6 billion in government property. The agency said it expects private insurance companies to pay out benefits for $20.6 billion in losses and said the federal government’s flood insurance program will pay an additional $7.5 billion.

A drought in the Midwest also took a toll on the economy. The extreme hot weather reduced farm inventory investment by $24 billion in the fourth quarter. But after adjusting for inflation, farm inventories were still a positive contributor to GDP for the first time in 2012.

News of economic contraction may weigh on Federal Reserve policy makers, who are meeting this week.

To prop up the feeble growth, Fed officials in December said that they expected to keep short-term rates near zero until the unemployment rate falls to 6.5% or lower. At 7.8% in December, the unemployment rate remains above historic norms despite steady improvement most of last year.

The Fed has also continued open-ended buying of Treasury debt and mortgage bonds in a effort to stimulate growth. The central bank will announce its latest policy moves later Wednesday.

Still, low inflation gives the Fed leeway to pursue continued economic stimulus. The price index for personal consumption expenditures–the Fed’s preferred gauge for inflation–advanced at an annualized 1.2% rate in the fourth quarter. The pace of core inflation, which excludes volatile moves in food and energy prices, was up 0.9%.

ADP: Private-Sector Hiring Rose in January

Separately Wednesday, a tally of private-sector hiring showed private businesses added new employees at a rapid clip in January despite layoffs at the largest U.S. companies.

Private-sector jobs in the U.S. increased by 192,000 this month, according to a national employment report calculated by payroll processor Automatic Data Processing Inc. ADP -0.85% and forecasting firm Moody’s MCO -0.25% Analytics.

Economists surveyed by Dow Jones Newswires expected ADP to report a gain of 165,000 private jobs. The December job gain was revised down to 185,000 from 215,000 reported a month ago.

According to ADP, firms employing between one and 49 workers increased jobs by 115,000 in January. Medium-sized businesses with payrolls of 50 to 499 workers hired 79,000 new employees. But large firms, businesses with 500 or more employees, cut 2,000 positions.

Service-sector jobs increased by 177,000 in January, but factory jobs fell by 3,000 slots.

The ADP report comes out two days ahead of the Bureau of Labor Statistics’ employment situation report. Last month’s strong ADP report caused economists and investors to lift their expectations for December payrolls, which include government jobs. Instead, the BLS reported a modest 155,000 new jobs were created last month.

Given that the January ADP report came in above expectations, some economists may change their Friday forecast. For now, economists surveyed by Dow Jones Newswires expect total nonfarm payrolls increased by 166,000 in January. This month’s jobless rate is projected to hold at 7.8%.

ADP, of Roseland, N.J., offers payroll processing, human resource and benefit administration services to about 600,000 clients worldwide. Economics firm Moody’s Analytics is a subsidiary of Moody’s Corp.

Another job-related release out Wednesday reported a smaller number of jobs created this month. TrimTabs Investment Research estimated between 135,000 and 155,000 jobs were added in January.

TrimTabs analyzes daily income tax deposits to the U.S. Treasury to calculate its job estimate. The company said it issued a range of jobs this month because the “bonus shifting in advance of this year’s tax hikes makes it much tougher than usual to estimate employment growth.”

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