U.S. fourth quarter GDP comes in with surprise 0.1% drop

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The latest U.S. GDP shows that the economy contracted 0.1% in Q4 againgst expectations of a 1.1% increase, driven by a large drop in government spending on Defence and a drop in private inventories. This compares with a 3.1% increase for Q3 2012 GDP. The Q4 figures represent the first drop in GDP since 2009.

Though growth is down, it gives some reassurance that the Federal Reserve is unlikely to turn off the quantitative easing taps any time soon and Q1 2013 is likely to be positively impacted by a swing back in private inventories (which impacted Q4 by 1.3%) and which could add 1% to the next number.

U.S. economic growth still remains relatively robust with underlying growth of 1-1.5%, but all eyes are on tonight’s statement from the Federal Reserve FOMC meeting (due 7.15 U.K.) and then on Friday’s U.S. non-farm payroll figures for January to give further data on jobs growth and any potential Fed policy adjustments.

In December, the Fed  said that interest rates would remain at rock bottom until the employment rate fell below 6.5% and it added another $45 billion per month of open ended Treasury bond purchases to the existing quantitative easing (QE3) program to buy $40 billion in mortgage debt a month. 

The background to the Q4 GDP is that:

Defence cuts reduced GDP by 1.33%. Real federal government consumption expenditures and gross investment decreased 15.0%  in the fourth quarter, in contrast to an increase of 9.5% in the third quarter.  National defense decreased 22.2%, compared to an increase of 12.9 percent. 

The drop in private inventories cut 1.27% from Q4 GDP growth after adding 0.73 percentage points to Q3 GDP growth.

Consumption grew by 2.2 per cent with durable goods up 13.9% , adding 1.5% to growth, and business investment rose by an annualised 8.4%, and housing investment rose by an annualised 15.3%. Imports dropped 3.2% and exports fell 5.7%.

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