BY | January 31, 2013

For the first time in years US GDP has shrunk. Notwithstanding the fact that unemployment rate remains high, experts say this is a temporary phase

(NVONews.Com) Big plunge in military spending, fall in exports, a steep slowdown in the buildup of inventories by businesses and anxieties are being attributed to the drop in Gross Domestic Product (GDP) of the United States as announced by the Commerce Department on Wednesday.

In fourth quarter the GDP unexpectedly fell at a 0.1 per cent annual rate after growing at a 3.1 per cent clip in the third quarter.

That was the worst performance since the second quarter of 2009 and showed the economy entering the new year with little momentum.

However, economists polled by Reuters had expected GDP to rise at a 1.1 percent rate and none had predicted a contraction. They now say there is no reason for panic as there was underlying data in the report which suggests that the economy is not on the brink of a recession or an extended slump. Residential investment jumped 15.3 per cent, a sign that the housing sector continues to recover, for one.

In the same way investment in equipment and software by businesses rose 12.4 per cent, an indicator that companies are still spending.

According to John Ryding, chief economist at RDQ Economics in New York: “We are not concerned that the economy is slipping back into recession.”

Although economists expected output to decline substantially from the 3.1 per cent annual growth rate recorded in the third quarter, the negative number caught Wall Street off-guard.

“I’m a little surprised,” said Michael Feroli, chief United States economist at JPMorgan. “It grabs your attention when you have a negative number across everyone’s screens.”

Stocks were down only slightly in early trading on Wall Street on Wednesday, as some traders shrugged off the unexpected drop.

The military spending dropped by 22.2 per cent––the sharpest quarterly fall in more than four decades.

As unemployment remains high at 7.8 per cent and growth expected to remain slow in the first quarter of next year, the government is likely to come under a barrage of fire.

Experts say a growth pace in excess of three per cent would be needed over a sustained period to significantly lower high unemployment. For the whole of 2012 the economy grew 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.

Slowdown in exports, which fell for the first time since the first quarter of 2009, also affected GDP. They have been hampered by a recession in Europe, a cooling Chinese economy and storm and strike-related port disruptions. Overall trade cut a quarter of a percentage point from the change in GDP.

However, the report showed that income available to households after taxes and inflation increased at a strong 6.8 percent rate in the fourth quarter.

In addition, the saving rate rose by more than one per centage point, which should cushion households against higher taxes.


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