Big cuts in U.S. defense spending partly account for the slight contraction in the U.S. economy during the fourth quarter of 2012.

By Stephen Kaufman,
IIP Staff Writer
Washington,
January 30, 2013
The U.S. Department of Commerce reported that the U.S. gross domestic product (GDP) shrank at an annualized rate of 0.1 percent during the last quarter of 2012, according to its initial estimate, citing a reduction in U.S. government spending, private inventory investments, exports and state and local government spending.

The report on the GDP, which is the sum of all goods and services produced in the country, also noted increased American consumer spending.

At the White House, press secretary Jay Carney told reporters January 30 that the reduction in U.S. economic growth reflects a “sharp drop in particular in defense spending,” with the reduction of American military activities in Iraq and Afghanistan and uncertainty over whether the U.S. Congress will reach agreement to avoid mandatory defense spending cuts that are scheduled to go into effect March 1.

The report shows the biggest reduction in U.S. defense spending in 40 years, Carney said, but he said the U.S. economy has the potential to see continued economic growth and job creation.

“We have seen consistent job growth over almost three years. Home prices are starting to climb back. Consumer confidence overall has been rising, and consumer spending has been rising. But there’s more work to do, and our economy is facing a major headwind,” pending Congress’ response to the scheduled spending cuts, Carney said.

The January 30 report is the Commerce Department’s first estimate of U.S. fourth-quarter growth, with updates expected in February and March. Most economists are predicting that the U.S. economy will grow at an annual rate of 1.5 percent in 2013. In 2012, there was a 2.2 percent growth rate.

Separately, the U.S. Federal Reserve announced that it is maintaining its policy of holding short-term interest rates near zero percent until the U.S. unemployment rate, currently at 7.8 percent, falls below 6.5 percent, following two days of meetings by the Federal Open Market Committee.

The Fed is also continuing to pump money into the U.S. economy to stimulate growth by purchasing $85 billion of U.S. Treasury securities and mortgage-backed securities per month.

“These actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative,” the Fed said in a January 30 press release.

In its assessment of the state of the U.S. economy, the Fed cited “weather-related disruptions and other transitory factors” as chief causes behind the pause in U.S. economic growth over recent months. Hurricane Sandy, which hit the eastern United States in late October 2012, will ultimately cost the U.S. economy as much as $60 billion, according to some estimates.

“Employment has continued to expand at a moderate pace but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has shown further improvement. Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable,” according to the Fed press release.