US GDP shrinks, but no need for panic: analysts

Reuters, Washington

Fri, Feb 01, 2013 - Page 15

The US 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.

GDP fell at a 0.1 percent annual rate, its weakest performance since it emerged from recession in 2009, the US 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. The weight from those two factors is expected to lessen in the first three months of this year.

Economists said Hurricane Sandy, which struck the US east coast in October last year may have cut about half a point off GDP, but the department said it was difficult to quantify the impact.

“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 2 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.

US financial markets largely shrugged off the decline in output, heartened by the acceleration in consumer spending and the 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 last month after increasing 185,000 in December last year.

Faster jobs growth could help the economy to weather the headwind of higher taxes and possible spending cuts this year. A payroll tax cut expired on Jan. 1 and big automatic spending cuts are set to take hold in next month unless US Congress acts.

US Federal Reserve officials said 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 US$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 last year the economy grew 2.2 percent, and a report today is expected to show the jobless rate held at 7.8 percent for a third straight month last month.

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.

However, 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.

“The slowing in the pace of inventory accumulation means that businesses will not have to pull back on production as much in the first quarter if consumer spending does downshift in response to the recent tax increases,” he said.

Many forecasters think the economy will grow only about a 1 percent pace in the first quarter, but then strengthen.