WRAPUP 7-U.S. GDP unexpectedly shrinks, decline seen temporary

Wed Jan 30, 2013 5:33pm EST

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* Fourth-quarter growth shrinks at 0.1 percent annual rate
    * Inventories, government spending and trade curb output
    * Residential, consumer and business spending limit decline
    * Economists see recovery still on track

    By Lucia Mutikani
    WASHINGTON, Jan 30 (Reuters) - The U.S. economy unexpectedly
contracted in the fourth quarter, but analysts said there was no
reason for panic given that consumer spending and business
investment picked up. 
    Gross domestic product fell at a 0.1 percent annual rate,
its weakest performance since the economy emerged from recession
in 2009, the Commerce Department said on Wednesday.
    If it were not for the hit from slower inventory growth and
the deepest plunge in defense spending in 40 years, the economy
would have grown at a respectable 2.5 percent rate. In addition,
economists said Superstorm Sandy, which struck the East Coast in
late October may have reduced GDP by about half a point.
    "Obviously, the headline number is a bit jarring, but the
underlying details of the report, by and large, are consistent
with an economy that is growing probably at a trend basis of
about two percent," said Michael Hanson, a senior economist at
Bank of America Merrill Lynch in New York.
    Economists polled by Reuters had expected GDP to rise at a
1.1 percent rate and none had predicted a contraction. While
many were surprised by the drop in output, they were heartened
by the acceleration in consumer spending and rebound in business
investment, which pointed to some fundamental economic strength.
    A second report, from payroll processor ADP, showed
private-sector payrolls expanded by 192,000 jobs in January
after increasing 185,000 in December, which also suggested the
recovery's fundamentals were sound. 
    Faster jobs growth could help the economy weather the
headwind of higher taxes and possible spending cuts. A payroll
tax cut expired on Jan. 1 and big automatic spending cuts are
set to take hold in March unless Congress acts.
    Federal Reserve officials, at the end of a two-day meeting,
noted economic activity had "paused" due to weather-related
disruptions and other "transitory factors." They expressed
confidence the recovery would regain speed with continued
monetary policy support, and they left in place their monthly
$85 billion bond-buying stimulus plan. 
    Economists say a growth pace in excess of 3 percent would be
needed over a sustained period to significantly lower high
unemployment. For the whole of 2012, the economy grew just 2.2
percent, and a report on Friday is expected to show the jobless
rate held at 7.8 percent for a third straight month in January.
    The Fed's commitment to loose monetary policy pushed the
dollar to a 14-month low against the euro. Prices for U.S.
Treasury debt rose marginally, while stocks on Wall Street fell.

 
    
    INVENTORY DRAG
    In the fourth quarter, the recovery had to deal with
uncertainty over the so-called fiscal cliff of scheduled tax
hikes and budget cuts, which hurt confidence even though
households and businesses seemed to shrug off the worries. 
    Businesses, caught with too much inventory on their hands in
the third quarter, slowed their stock building in the final
three months of the year. That slowdown reduced GDP growth by
1.27 percentage points, the most in two years.
    But with the pick-up in consumer spending in the fourth
quarter, businesses now will need to replenish stocks, which
should help lift growth early this year.
    "Today's number actually leaves the economy relatively
well-positioned heading into the first quarter," said Michael
Feroli, an economist at JPMorgan in New York.
    The GDP report showed government spending tumbled at a 6.6
percent rate, with defense outlays plunging at a 22.2 percent
pace, the largest drop since the third quarter of 1972.
    Defense spending is on a downward trajectory as the
government winds down two wars, but it had jumped in the third
quarter, setting up for a larger-than-normal decline in the
final three months of the year.
    Trade also cut into the economy, slicing a quarter of a
percentage point off the change in GDP. Exports, which have been
hampered by a recession in Europe, a cooling Chinese economy and
storm and strike-related port disruptions, fell for the first
time since the first quarter of 2009.
    Caterpillar Inc, the world's largest maker of
construction equipment, on Monday reported a sharp drop in
quarterly profits, citing weak demand in China as one reason for
the decline. 
    
    PLENTY OF POSITIVES
    There were several bright spots in the GDP report.
    For one, household income after taxes and inflation
increased at a strong 6.8 percent rate. That allowed households
to step up their saving, and the saving rate rose by more than a
percentage point.
    Consumers were also helped by slowing inflation. An
inflation gauge in the report advanced at just a 1.2 percent
pace, down from 1.6 percent in the third quarter. So-called core
prices rose just 0.9 percent, the smallest gain in two years.
    Consumer spending, which accounts for more than two-thirds
of economic activity, rose at a 2.2 percent rate, accelerating
from the prior quarter's 1.6 percent growth pace, while business
investment rebounded after its first drop in 1-1/2 years.
    The housing market was another positive. 
    Homebuilding grew at a 15.3 percent rate after notching a
13.5 percent growth pace in the third quarter. It added to
growth last year for the first time since 2005. 
    "A turnaround in the housing market will be a key support to
the economy this year, with homebuilding contributing to growth
and higher home prices supporting consumer spending," said
Stuart Hoffman, chief economist at PNC Financial in Pittsburgh.
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