|Fed predicts moderate growth as US economy slips in last quarter
The US economy shrank in the fourth quarter last year as Washington slashed defense spending and businesses trimmed inventories ahead of the feared fiscal cliff, Commerce Department data showed.
Weather, including the super storm Sandy was also a key factor in the economy's 0.1 contraction, the first since the Great Recession ended in mid-2009, AFP reports.
But economists, though surprised at the sharpness of the slowdown, played down the reversal, noting strengths in consumer spending and business investment.
And the Federal Reserve attributed it to “weather-related disruptions and other transitory factors,’’ even as the central bank kept its easy-money policy in place to help the economy.
At the end of a two-day meeting, the Fed's policy board, the Federal Open Market Committee, predicted that the economy would grow “at a moderate pace’’ in the months ahead.
As expected, it left in place its record-low 0-0.25 percent benchmark interest rate and its US$85 billion a month asset purchase program, aimed at holding long-term interest rates down to shore up growth.
US equity markets fell in reaction to the fourth-quarter data; the S&P 500 lost 0.39 percent to end at 1,501.96. The dollar also fell against the euro, which bought US$1.3564 compared with US$1.3493 late Tuesday.
The Commerce Department's first estimate of quarterly growth is often heavily revised later as the data becomes more complete, but economists were surprised that it had turned negative. The data showed that authorities at all levels tightened the reins in the October-December period, forcing the slowdown.
The cuts were unexpectedly sharp at the federal level, with 15 percent overall contraction in spending.
Underlying that was a 22 percent reduction in defense outlays ahead of the programmed “sequester’’ – a US$110 billion federal spending pullback originally set to hit from January 1.
The sequester, half of which must come from defense, still looms at the end of March if political leaders cannot craft a less austere program for deficit reduction.
But the avoidance of the sharp tax increases of the fiscal cliff before the January 1 deadline could help with a rebound this quarter, especially from business investment, according to analysts.
The Commerce Department said that despite the dismal fourth quarter, the economy expanded 2.2 percent overall in 2012, a pickup from 1.8 percent in 2011.
The third quarter came in at a strong 3.1 percent, and economists said they expect a modest rebound during the current 2013 first quarter.
Economists said the data revealed encouraging strengths in the economy.
Despite the looming cliff consumer spending climbed from the third quarter, as did business investment in equipment and software, and investment in housing.
But businesses pulled back investment in inventories, and the employment record shows they were cautious about hiring during the period.
The Federal Reserve's policy statement made brief reference to the poor growth, but the FOMC appeared confident that, with its ultra-low interest rate policy in place, growth would resume to the moderate pace of the past year, with some of the strains of the euro zone crisis easing.
But it warned that it “continues to see downside risks to the economic outlook.’’