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Economy grows less than expected in 4th quarter

by Victoria Yates
Feb 28, 2013

GDP4Q_GDP 2012 4Q second estimates

Victoria Yates/Medill

GDP significantly impacted by defense spending cuts.

The U.S economy eked out minor growth in the fourth quarter of 2012, a marked improvement from previous reports of a contraction but still far behind what economists were expecting.

Real gross domestic product increased at an annual rate of 0.1 percent in the last quarter of 2012, up from the January estimate that showed a 0.1 percent decline, according to the Commerce Department report released Thursday.

Economists had been expecting GDP to grow by 0.5 percent.

GDP calculations take into account all private and public consumption, government spending, private investment and the net value of exports to measure the overall health of the economy.

While the latest estimates “may not sound like much of a revision, much less much of an improvement, there were some notable changes to the underlying details,” wrote Richard Moody, chief economist at Alabama-based Regions Financial Corp. in a research note.

In particular, a weather-related drop in farm-inventories and government spending are “now shown to have been bigger drags than previously reported,” Moody said.

The most substantial reduction in federal investment came from a 22 percent plunge in defense spending, a drop that surprised some analysts.

The tightening of Pentagon spending reflects the winding down of wars in Iraq and Afghanistan, as well as increased budgetary pressures in the federal government.

There were some positive omens for the future, however, as the private sector showed signs of strengthening.

Residential investment grew by 17.4 percent, up 2.1 percent on initial estimates of 15.3 percent, and more than 5 percent higher than the same quarter last year.

In the business sector, fixed investment grew by 11.2 percent, higher than the first estimate of 9.7 percent in January.

The looming sequestration and its impact on federal spending is nevertheless aversely affecting economists’ outlook for sustained GDP growth in 2013.

“Federal government spending is now expected to contract more rapidly than we initially expected, in response to sequestration,” said Diane Swonk, chief economist at Mesirow Financial Holdings Inc. on the company’s Economic Minds blog. “That will hit healthcare and defense spending by the government the hardest.”

Moody predicts that real first-quarter growth in 2013 will come in better than 2 percent. “Not great but, considering the numerous fiscal policy hurdles Congress has laid in its path, the economy is more than holding its own,” Moody said.

For 2012 as a whole, real GDP grew by 2.2 percent, up from 1.8 percent in 2011.

Thursday’s report was the second of three estimates issued by the government. The final report on fourth quarter growth is scheduled for March 28.