Is This Drop In GDP As Bleak As It Looks?

With the deepest cuts to defense spending in 40 years, fewer exports, and low growth in business stockpiles, the United States economy unexpectedly shrank from October to December, according to the advance figures released by the Commerce Department’s Bureau of Economic Analysis.

Real gross domestic product, the output of goods and services produced by labor and property located in the United States, contracted by 0.1 percent in the last quarter — the first drop in economic output in 3 1/2 years. This represented a significant slowdown from the 3.1 percent growth reported in the previous three months.

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Even increases in consumer spending and business investment could not offset the government spending cuts and slower inventory growth, which subtracted 2.6 percentage points from GDP. Economists told The Washington Post that the drop was not “as bleak as it looked” because the decrease was largely the result of one-time factors…

“Frankly, this is the best-looking contraction in U.S. GDP you’ll ever see,” Capital Economics economist Paul Ashworth said in a note to clients, seen by the Post. “The drag from defense spending and inventories is a one-off. The rest of the report is all encouraging.” Ashworth is referring to consumer spending and business investment, which added 1.5 percentage points and 1.1 percentage points to GDP, respectively.

And despite the negative implications the fourth quarter’s drop may have for the future, it did not bring economic growth down for the full year; in 2012, the economy expanded 2.2 percent, an increase from 2011’s 1.8 percent.

But the decrease is still concerning. The economic contraction combined with the lowest consumer confidence level in more than a year has the potential to raise concerns about the strength of the economy in 2013.

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