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U.S. Economy Unexpectedly Contracts Amid Sharp Drop In Defense Spending


Economic activity in the U.S. unexpectedly contracted in the final three months of 2012, according to a report released by the Commerce Department on Wednesday, with GDP falling for the first time in over three years.

The report showed that GDP edged down by 0.1 percent in the fourth quarter after surging up by 3.1 percent in the third quarter.

The modest drop came as a surprise to economists, who had expected GDP to increase by about 1.0 percent. The decrease also reflected the first drop in GDP since the second quarter of 2009.

A sharp drop in defense spending contributed to the unexpected contraction, with defense spending falling at the fastest rate since 1972.

Defense spending tumbled by 22.2 percent in the fourth quarter following a 12.9 percent jump in the third quarter, subtracting 1.3 percent from overall GDP growth.

The change in real private inventories subtracted an additional 1.3 percent from GDP growth, while a 5.7 percent drop in exports subtracted 0.3 percent.

On the other hand, the report showed that consumer spending growth accelerated to 2.2 percent in the fourth quarter from 1.6 percent in the third quarter.

Business investment also showed a notable 8.4 percent increase in the fourth quarter in contrast to a 1.8 percent decrease in the third.

Paul Ashworth, Chief U.S. Economist at Capital Economics, said, "Frankly, this is the best looking contraction in GDP you'll ever see."

"First-quarter GDP growth is going to be pretty weak because of the expiry of the payroll tax cut," he added. "But there is nothing in these figures to change our view that U.S. GDP growth will accelerate as this year goes on."

The Commerce Department also said its reading on core consumer prices rose by 0.9 percent in the fourth quarter following a 1.1 percent increase in the third quarter.

Despite the contraction in fourth quarter GDP, the report also showed that real GDP increased by 2.2 percent in 2012 compared with an increase of 1.8 percent in 2011.

by RTTNews Staff Writer

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