Economy slows in fourth quarter: Why?

The economic news on Wednesday wasn’t what anybody expected. The U.S. economy actually contracted by 0.1 percent in the fourth quarter, off from the sluggish growth that economists had been forecasting for the retail-focused quarter.

The contraction, the first since the end of the recession in 2009, begs the question: why?

By and large, you can point to an “unusually large drop in defense spending” in the fourth quarter, Ethan Harris, co-head of global economics research at Bank of America Merrill Lynch, told The New York Times, who attributed the negative growth to “the tip of the iceberg on fiscal austerity from Washington.”

Data from the Commerce Department’s Bureau of Economic Analysis bears Harris out on that point. Overall federal government expenditures were down 15 percent in the fourth quarter, with defense spending down 22.2 percent. Both sectors had been up in the third quarter when overall gross domestic product was up 3.1 percent.

Local and state government spending was also down slightly in the fourth quarter, at an 0.7 percent rate, after a nominal 0.3 percent increase in the third quarter.

A big decline in business inventories also contributed to the slowdown. All told, the decline in government spending and business inventories shaved as much as 1.4 percentage points from the growth rate.

Factoring those out, then, we’re still looking at the weak growth numbers that had been projected going into this week, in the 1.2 to 1.3 percent range. Most economists suggest that the economy needs to grow at a sustained 2.5 percent rate to achieve net job growth, but according to the Bureau of Economic Analysis numbers, the U.S. economy grew just 2.2 percent in 2012 after posting a 1.8 percent growth rate in 2011.

There are some silver linings in the clouds. The U.S. auto industry appears to have rebounded from the recession, and the housing market also looks to be gaining strength after bottoming out at the depths of the economic downturn.

Forecasts for 2013 are projecting another year of modest 2 percent growth. A key curb on possible greater growth: the federal government.

“One way or the other, government is going to be a constraint on growth,” James Marple, senior economist at TD Bank, told ABC News.