WASHINGTON – The American economy shrank at the end of last year for the first time since the recession ended, according to new government data, as deep cuts in federal spending torpedoed what otherwise looked to be a modest recovery.
Consumers did their part, spending more and opening their wallets for bigger-ticket items such as automobiles. Companies invested in new equipment and software. Housing continued to climb.
But those gains were overshadowed by the massive decline in government spending, especially in defense. The result was a 0.1 percent annualized dip in the nation’s gross domestic product. The report highlighted the contrast between what appears to be a slowly healing private sector and a public sector still buffeted by budget cuts.
The economy was “being pulled in opposite directions . . . and ending up going nowhere,” said Richard Moody, chief economist at Regions Financial.
The reminder that the U.S. economy still remains a long way from being fully healed put the brakes on a January rally that has pushed stocks close to record levels. The Standard & Poor’s 500 fell 6 points, or 0.4 percent, to close at 1,501.96, its biggest decline since Dec. 28. The Dow Jones industrial average fell 44 points, or 0.3 percent, to 13,910.42. The Nasdaq composite fell 11 points to 3,142.31.
The biggest threat to the recovery now appears to be Washington, with lawmakers gearing up for another round of debates over spending cuts and raising the nation’s debt ceiling. Wednesday’s GDP report served only to harden the battle lines between Republicans who believe significant spending cuts are necessary to balance the federal budget over the next decade and Democrats who argue they will stunt growth.
Fourth-quarter economic activity was far below the 1.1 percent annual growth rate that economists had predicted. Exports fell at a rate of 5.7 percent in the fourth quarter, reflecting the slowdown in Europe. Businesses also drew down their inventories after unusually high stockpiling in the previous period. That reduced economic growth by 1.27 percentage points.
But perhaps the biggest surprise was the size of the drop in federal spending: 15 percent at an annual rate during the fourth quarter. Defense spending suffered an even bigger decline, dragging down growth by 1.3 percentage points. Many agencies began adopting contingency plans, instituted hiring freezes and delayed projects in anticipation of widespread budget cuts — all of which depress spending.
Still, economists said the decline looks especially dramatic because government spending had jumped more than usual in the previous quarter. That may have been a reflection of government agencies and private contractors shifting spending earlier in the year in anticipation of budget cuts, boosting third-quarter growth at the expense of the fourth.
The negative numbers mask the broad-based growth in the private sector. Consumer spending picked up to a 2.2 percent annual pace. Housing rose at a 15.3 percent rate, and businesses increased investments in equipment and software.
For the entire year, GDP grew at a 2.2 percent rate, a faster pace than in 2011.