The U.S. economy unexpectedly reversed course in the final quarter of 2012 and contracted at a 0.1 percent rate, the Commerce Department said Wednesday, its worst performance since the aftermath of the financial crisis in 2009.
The drop in gross domestic product was driven by a plunge in military spending, as well as fewer exports and a steep slowdown in the buildup of inventories by businesses. Anxieties about the fiscal impasse in Washington also contributed to the slowdown, one reason that stockpiles grew more slowly.
Despite the overall contraction, there was underlying data in the report suggesting the economy is not on the brink of a recession or an extended slump. Residential investment jumped 15.3 percent, a sign that the housing sector continues to recover, for one. Similarly, investment in equipment and software by businesses rose 12.4 percent, an indicator that companies are still spending.
Although economists expected output to decline substantially from the 3.1 percent annual growth rate recorded in the third quarter, the negative number still caught Wall Street off-guard. It was the weakest economic report since the second quarter of 2009.
“I’m a little surprised," said Michael Feroli, chief U.S. economist at JPMorgan. “It grabs your attention when you have a negative number across everyone’s screens."
Stocks were down only slightly in early trading on Wall Street, as some traders shrugged off the unexpected drop.
Feroli had been expecting growth to come in at 0.4 percent, which was less than the 1.1 percent consensus among economists on Wall Street. Like some other observers, Feroli said there were hints the economy was performing slightly better than the headline number suggested.
The 22.2 percent drop in military spending — the sharpest quarterly drop in more than four decades — along with the drop in inventories and exports overwhelmed more positive indicators in the private sector, he said.
For example, final sales to private domestic purchasers, which strips out government spending as well as trade and inventories, rose by 2.8 percent.