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Economy shrank by 0.1 percent in fourth quarter of 2012

300px-Hamburg.CTA.Altenwerder.BungaRaya.wmtThe economy shrank unexpectedly by 0.1 percent in the fourth quarter of 2012, marking the first decline since the U.S. began its recovery from the recent financial crisis.

GDP growth in the fourth quarter slowed down from the 3.1 percent seen in the third quarter, and the fourth quarter decline brought 2012 GDP growth to 2.2 percent.

The decline was driven primarily by a drag from exports, reduced government spending and inventory drawdown. Federal defense spending decreased at an annual rate of 22 percent in the fourth quarter, which produced a 1.3 percent drag on GDP growth and marked the largest decrease in federal defense spending in more than 40 years. Non-defense spending increased 1.4 percent, compared to three percent in the third quarter.

The drawdown on inventories created a 1.3 percent drag on growth on GDP, though declining inventory reflects high demand, which could indicate that production will increase over the next few months. Net exports produced a 0.3 percent drag on GDP growth.

Fundamentals, however, showed improvement during the third quarter. Personal consumption contributed to 1.5 percent GDP growth, an increase from 1.1 percent in the second quarter. Fixed investment also increased to 1.2 percent from 0.1 percent in the previous quarter. Residential and non-residential investments also improved and could help sustain the recovery.

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