US economy contracted in Q4 with GDP down by 0.1%

30 January 2013 14:26  [Source: ICIS news]

WASHINGTON (ICIS)--The US economy contracted slightly in the fourth quarter of 2012, the Commerce Department said on Wednesday, showing the first negative growth in GDP since the 2008-2009 recession ended in June 2009.

In its first estimate of fourth quarter gross domestic product (GDP), the department said that the nation’s economy shrank by a narrow 0.1% in the final three months of 2012 compared with economic activity in the third quarter.

For the full year 2012, US GDP grew at 2.2%, a pace that is below the so-called trend growth of 3% to 3.5% that is typical of normal economic times in the US.

But that 2.2% expansion of GDP for last year is better than the 2011 GDP reading of 1.8%.  The US saw GDP growth of 1.9% in the first quarter, 1.5% in the second, and 2.7% in the third quarter of 2012.

For the fourth quarter, the department said that the economic contraction was driven by declines in private inventory investment, reductions in federal and state government spending and a sharp 5.7% decline in exports.

The quarter saw a solid 2.2% gain in consumer spending, what the government calls personal consumption expenditures (PCE), and a strong 15.3% expansion in the recovering housing market.

But those advances were not quite enough to offset the declines in inventories, government spending and falling exports, leaving the nation with that slight 0.1% GDP decline for the quarter.

The fourth quarter downturn may in part be related to business concerns about the so-called fiscal cliff that was to take effect on 1 January this year when mandated major budget cuts and tax increases were to take effect.

Although US businesses are said to have abundant cash reserves, owners were reluctant to invest in facilities, equipment or new hiring until they could know what level of taxation they might be facing in 2013.

In an 11th hour move, Congress restored many of the personal tax rate reductions that were due to expire.  And the legislature has in effect postponed the budget cuts part of the fiscal cliff to later in this quarter.

Economists will be watching to see if the first quarter of this year shows another slight downturn in GDP or if the economy begins to pick up again.

If the second quarter were to show a contraction, that would mark the beginning of a new US recession.  A decline of GDP over two consecutive quarters is recognised as the onset of recession.

The department's report noted that its first estimate of fourth quarter economic activity is based on source data that are incomplete and subject to further revision.  Subsequent estimates of fourth quarter GDP, due over the next two months, could show an upward revision of the last quarter's economic performance.

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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