The rate of contraction was also well below the 3.1 percent growth seen in the third quarter and, if first quarter GDP remains weak, the U.S. risks entering a second recession in four years.
According to the Bureau of Economic Analysis, "the decrease in real GDP in the fourth quarter primarily reflected negative contributions from private inventory investment, federal government spending, and exports that were partly offset by positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased."
The weakening of the dollar in the fourth quarter aided net exports, as indicated by the BEA. However, the massive build up in inventories in the third quarter, which added approximately one percent to third quarter GDP, was drawn down in the fourth quarter as inventories subtracted 1.27 percent from GDP. Excluding the change in these inventories, the economy actually grew 1.17 percent, in line with forecasts.
Personal consumption expenditures were strong in the quarter, rising 1.52 percent, however government expenditures declined 1.33 percent ahead of the Fiscal Cliff as the government prepared for budget cuts.
One fear ahead of the Fiscal Cliff was that private investment in fixed assets would weaken demonstrably as companies lost confidence in the economy. However, fixed investment rose 1.19 percent in the quarter.
Inflation also remained in check in the most recent quarter, which could prompt the Federal Reserve keep policy loose for the foreseeable future. PCE Inflation, the favored measure of inflation by the Ben Bernanke, rose 1.3 percent in the fourth quarter after rising 1.4 percent in the third quarter, well below the Fed's target of 2.5 percent inflation.
Also, core PCE inflation, exempting volatile energy and food prices, rose 1.1 percent in the quarter after rising 1.2 percent in the third quarter.
As stated, government spending was weak. The BEA noted that, "Real federal government consumption expenditures and gross investment decreased 15.0 percent in the fourth quarter, in contrast to an increase of 9.5 percent in the third. National defense decreased 22.2 percent, in contrast to an increase of 12.9 percent. Non-defense increased 1.4 percent, compared with an increase of 3.0 percent. Real state and local government consumption expenditures and gross investment decreased 0.7 percent, in contrast to an increase of 0.3 percent."
Personal income in the fourth quarter, a good measure of how much money individuals pocket from all sources of income, rose a strong 7.9 percent in the quarter after rising 2.2 percent in the third quarter.
"The acceleration in personal income primarily reflected a sharp acceleration in personal dividend income, an upturn in personal interest income, and an acceleration in wage and salary disbursements. The sharp acceleration in personal dividend income reflected accelerated and special dividends that were paid by many companies in the fourth quarter in anticipation of changes in individual income tax rates." Look for this measure to reverse in the first quarter as the effects of special dividends wane.
Markets flinched on the release into a more risk-off mode, as stock futures and other risk assets declined quickly. S&P 500 futures declined to 1,502.50, a loss of 2.6 index points.
Gold rose on the news to $1,676.90, a gain of 0.86 percent, as weaker GDP means that the Fed may be forced to ease more than expected, and oil retreated from earlier gains to $97.72 per barrel. The USD/JPY fell from 91.30 on the news to below 91 before rebounding to 91.15 and the EUR/USD fell back below 1.3550 to 1.3543.
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