Central Bank Says US Economy 'Paused'

The US economy shrank 0.1 per cent at an annualised rate in the fourth quarter of 2012, rattling financial markets as one-off factors overwhelmed resilience in underlying demand. Much of the fall in gross domestic product was due to a big reversal in business inventories and a plunge in federal defence spending – both highly volatile – which each knocked 1.3 percentage points off growth. That suggests the underlying economy remains on a weak but stable growth path of 1-2 per cent. But the first reported decline in the US economy since the end of the recession in 2009 is a blow to confidence and highlights the uncertainty caused by fiscal policy. Market expectations were for a rise of 1.1 per cent. Consumption grew by 2.2 per cent at an annualised rate, adding 1.5 percentage points to growth, while business investment shrugged off fiscal cliff concerns to rise by an annualised 8.4 per cent, and housing investment rose by an annualised 15.3 per cent.



Those numbers pointed to healthy underlying demand. “Frankly, this is the best looking contraction in GDP you’ll ever see,” said Paul Ashworth, chief US economist at Capital Economics in Toronto. “First-quarter GDP growth is going to be pretty weak because of the expiry of the payroll tax cut. But there is nothing in these figures to change our view that US GDP growth will accelerate as this year goes on,” he said. The weakness came from two categories that are notorious for their volatility. Inventory growth – which over the long run should average out to roughly zero – had added 0.7 percentage points to gross domestic product in the third quarter and defence spending had added 0.6 percentage That suggests a better guide to the underlying state of the economy is to look at the fourth quarter alongside third-quarter growth of 3.1 per cent – ending up with a mediocre, but steady, average of 1.5 per cent. “While inventories and government are what are most likely to catch the market’s eye it is hard to put a particularly positive spin on such a weak headline,” said David Semmens, senior US economist at Standard Chartered. “It will be important for Friday’s employment number to settle people’s nerves that this [the GDP figures] reflect the fiscal cliff concerns rather than a genuine stalling of the US economy.” There was an encouraging sign for Friday’s payrolls report when ADP, the private payrolls processing company, said on Wednesday morning that its survey found 192,000 new jobs created in December. Job growth was particularly strong at small businesses, it reported. The effects of the protracted negotiations to avoid the fiscal cliff – as government spending cuts and tax rises were due to be triggered by year-end – were in evidence in a large rise of 6.8 per cent in disposable incomes in the fourth quarter. Given modest wage and jobs growth, the most likely explanation was that wealthier consumers brought income and capital gains forward into 2012, in the expectation that tax rates were about to rise. Points. Both were more than reversed in the following three months. This was expected as there are feuds with the immigration and the gun laws these have to be polished yet I thank you Firozali A.Mulla DBA