US Economy Ends 2012 in Reverse Gear

The US economy unexpectedly suffered a slight contraction in the final quarter of 2012, upsetting forecasts of continued growth and marking the first decline since the country moved out of recession in the second half of 2009. Speculation as to the causes include uncertainty caused by the so-called US ‘fiscal cliff’ of potential tax hikes and spending cuts that loomed at the end of last year.

Gross domestic product (GDP) dipped by 0.1% in Q412 against expectations for a 1.1% increase, largely reflecting a sharp cutback in business inventories and also government spending. The latter declined by 6.6%, which included a 22.2% drop in federal defence spending. Both shaved an estimated 1.3 percentage points off growth, suggesting that the underlying US economy continued to show modest, but consistent growth of 1% to 2%. 

A 5.7% drop in US exports also contributed to the Q4 figure, which contrasted with GDP growth of 3.1% in Q312 and brought the overall rate for 2012 to 2.2%; still an improvement on the 1.8% growth rate for 2011.

The economy also had to contend in Q412 with the effects of hurricane Sandy, which struck the east coast of the US in late October and was estimated to have knocked a further 0.5 percentage point off growth. Uncertainty over the impending fiscal cliff at the end of 2012, which may have dented business and consumer confidence, although data also indicated a strengthening in consumer spending and a rebound in business investment by an annualised 8.4%.

The US Federal Reserve announced last month that short-term interest rates will be maintained at close to zero until the country’s unemployment rate, currently 7.8%, falls to 6.5% or below.

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