US growth falls off a cliff again

Tim Wallace
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THE US economy shrank unexpectedly in the final three months of 2012, official figures showed yesterday, taking markets and analysts by surprise.

Ben Bernanke at the Federal Reserve responded by holding interest rates at record lows and continuing to print $85bn (£53.8bn) a month to buy government bonds and mortgage backed securities.

Stocks dipped on the news, with the S&P 500 edging down 0.4 per cent.

The world’s largest economy had seen a steady recovery with growth far exceeding the flat-lining UK and the recession-struck Eurozone.

But US GDP contracted by an annualised 0.1 per cent in the fourth quarter as firms cut back on building up stock and government spending on defence plunged.

That represents a sharp swing back from growth of 3.1 per cent in the previous three-month period, and takes growth for 2012 overall to 2.2 per cent.

Much of the sharp turnaround was down to volatile defence spending which jumped 12.9 per cent in the third quarter before plunging 22 per cent in the fourth, leading a 6.6 per cent drop in government spending in the final three months.

Once defence and inventories are stripped out, growth was a healthier 2.5 per cent, with capital expenditure and consumer spending both staying strong in the three-month period.

Analysts argued that bodes well for the coming year.

“While the US GDP report was clearly disappointing, the details of the report were not as weak, or as shocking, as the headline numbers suggest,” said JP Morgan Asset Management’s Andrew Goldberg. “Gains in housing and consumption offset much of the weakness, and recent economic readings point to growth closer to two per cent in the first quarter than the contraction seen last in this report.”

But incoming tax rises could be a threat to that optimism.

“US households have made considerable progress in paying off their debt. This progress, moderate employment growth and the apparent turn-around in the housing market should support consumption in 2013,” said Berenberg Bank’s Christian Schulz.

“However, we expect austerity measures such as the increase in payroll tax to dampen growth, and the latest decline in consumer confidence provides evidence of that.” The Fed agreed, arguing its current very loose policy means inflation and employment are both gradually improving.

“With appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the committee judges consistent with its dual mandate,” it said in a statement.