U.S. economy slips 0.1% in 4Q on lower military spending

Cargo vessels disburse and take on containers late

Cargo vessels disburse and take on containers late last year in the Port of Los Angeles. The U.S. Commerce Department reported Wednesday, Jan. 30, 2013, that the Gross Domestic Product slipped 0.1 percent in the fourth quarter on a reduction in U.s. military spending. (Dec. 5, 2012) (Credit: AP)

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The U.S. economy shrank unexpectedly late last year, a reminder of the biggest threat it faces in 2013: sharp government spending cuts and prolonged political budget fights.

A plunge in defense spending helped push the economy into negative territory for the first time since mid-2009. The contraction in the October-December quarter came in at an annual rate of 0.1 percent, according to a government estimate released Wednesday.

The likelihood of another recession appears remote. The economy is forecast to grow around 2 percent this year as strength in areas like housing and auto sales could partly offset government cutbacks. Investors appear unfazed, too: The stock market has surged more than 6 percent this year and is nearing an all-time high.

But economists warn that further spending cuts would weaken a still-precarious recovery.

"One way or the other, government is going to be a constraint on growth," said James Marple, senior economist at TD Bank.

The Commerce Department said the economy shrank last quarter mainly because companies restocked at a slower rate and the government slashed defense spending. Exports also fell, and economists said superstorm Sandy could have cut around 0.5 percentage point off fourth-quarter growth.

While some of those factors are temporary, the slowdown from the 3.1 percent annual growth rate in the July-September quarter was still unexpectedly sharp.

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

The Federal Reserve referred to the fourth-quarter slowdown Wednesday in a statement after a policy meeting. The U.S. economy appears to have "paused in recent months," the Fed said, mainly because of temporary factors. The central bank said growth would likely resume this year. But it reaffirmed its commitment to stimulating the economy by keeping borrowing costs low for the foreseeable future.

Looming government cutbacks may already have hindered the economy: Concern over the year-end "fiscal cliff" could be one reason businesses slowed their restocking. Congress managed to avert the fiscal cliff but only postponed the start of automatic spending cuts until March 1.

The drag from the government comes as private-sector growth is picking up. Consumers and businesses spent more in the October-December quarter compared with the July-September quarter.

But defense spending plummeted more than 22 percent, the steepest drop in more than 40 years. Nearly all those cuts were in services, such as weapons maintenance and personnel support. The Defense Department said spending fell in part because of the drawdown in forces from Iraq and Afghanistan.

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