Economy unexpectedly contracts in fourth quarter

WASHINGTON -- The U.S. economy shrank at a 0.1% annualized rate in the last three months of 2012 amid fears about the fiscal cliff, the Commerce Department reported Wednesday.

It was the first time economic growth contracted since the end of the Great Recession in mid-2009 and showed how much the concerns about large tax hikes and federal spending cuts weighed on businesses as last year drew to a close.

A last-minute deal in Washington averted most of the tax increases and delayed the automatic spending cuts. Economists say they believe that will lead to economic growth in the first three months of 2013.

But Thursday’s report -- the government’s first estimate of fourth-quarter economic activity -- was a surprise.

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Economists has projected that the gross domestic product -- the nation’s total economic output -- would expand about 1% in the fourth quarter, a slowdown from the 3.1% growth in the July-through-September period.

But a drop in inventory investment by businesses, federal government spending and U.S. exports led to the first contraction since the economy shrank 0.3% in the second quarter of 2009.

Leading the drop in government outlays was a 22.2% drop in defense spending.

“The economy ended 2012 on a very sluggish pace, even though one-time factors put the number below the trend,” said Kathy Bostjancic, director for macroeconomic analysis at the Conference Board.

“While the inventory runoff and the steep decline in defense spending in the fourth quarter made economic activity look weaker than it really was, the underlying demand from consumers and businesses kept moving forward at a moderate pace,” she said.

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