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Economy Shrinks for First Time in Years

Economists had expected the economy to grow slightly


A steep drop in defense spending, lower exports and businesses stockpiling smaller inventories sent the U.S. gross domestic product down 0.1% during the final quarter of last year, the Commerce Department said on Wednesday.

The contraction caught economists, who were expecting an average gain of 1.1%, by surprise and marked the worst GDP showing since 2009, the New York Times noted.

4 Things You Need To Know About the Economy
4 Things You Need To Know About the Economy

While the overall economy shrunk during the fourth quarter, business spending on software and equipment rose 12.4%. Investment in residential properties rose 15.3%, signaling that the housing market recovery hasn’t cooled yet.

Spending on defense related equipment and services tumbled 22.2% during the quarter, the largest reduction in more than forty years, likely driven by political wrangling over the U.S. budget and the looming “fiscal cliff” that occupied Washington during the final months of last year.

The U.S. economy expanded 2.2% last year, up from 1.8% in 2011. However, unemployment remained around 7.8%, historically high. Economist had expected U.S. GDP to grow at an annual rate of 1.5% during early 2013. But that estimate will likely be revised downward based on last quarter’s contraction.

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