U.S. economic growth unexpectedly ground to a halt at the end of last year, falling from a healthy 3.1 percent gain in the summer to a 0.1 percent contraction in the final quarter, the Commerce Department reported Wednesday.
Many economists said the small decline was a fluke caused by Superstorm Sandy, while the White House said the report showed the economic perils of the budgetary impasse and deep federal spending cuts still being discussed in Congress.
According to the department, growth was snuffed out by an unusual 22.2 percent annualized plunge in defense spending, combined with a 5.7 percent drop in exports and sizable declines in business spending on inventories.
Superstorm Sandy, which hit the East Coast in midquarter at the end of October, caused a temporary halt in shipments of exports and inventories, possibly accounting for much of the drop, the Federal Reserve and other analysts reasoned.
But the huge drop in defense spending was not caused by the storm and serves as a warning for those in Congress who want another round of across-the-board cuts of 9 percent in defense and domestic spending this spring, the White House said.
"Today's report is a reminder of the importance of the need for Congress to act to avoid self-inflicted wounds to the economy," said Alan Krueger, chairman of the president's Council of Economic Advisers. "The administration continues to urge Congress to move toward a sustainable federal budget in a responsible way that balances revenue and spending, and replaces the sequester, while making critical investments in the economy."
The setback for the economy in the fourth quarter was the first since the Great Recession from December 2007 to June 2009 and shows the economy flirted with but likely avoided a renewed downturn at the end of last year. Growth for the full year clocked in at 2.2 percent, up from 1.8 percent in 2011.
The big temporary drags on the economy that erased growth in the fourth quarter were roughly offset by a 2.2 percent annualized gain in consumer spending, an 8.4 percent jump in business investment and a robust 15.4 percent surge in housing investment, the department reported.
"This report is nowhere near as bad as it looks on the surface," said Nigel Gault, chief U.S. economist at IHS Global Insight. "The drop should be viewed as payback for a strong third quarter."
Mr. Krueger said the economic contraction was a result of disruptions by Sandy and a "precipitous decline" in defense spending likely caused by uncertainty about the across-the-board spending cuts, or sequesters, that were looming at the end of the year. Those cuts were put off until March 1 under a New Year's Day deal between President Obama and Congress, and many in Congress are considering letting the sequesters take effect this time.
Mr. Gault said it was a stretch to blame the quarterly contraction on fears about the "fiscal cliff," including the looming sequester.
Many economists feared that worries about the cliff would dampen consumer and business spending, but that did not occur. Mr. Gault said only some of the slowdown in inventory accumulation appears to be attributable to apprehension about the fiscal cliff.
"The decline in GDP looks quirky and will not persist," said Eric Green, an analyst with TD Securities. He expects a "strong bounce" in growth in the first quarter this year, with annual growth averaging from 2.5 percent to 3 percent.
But the weak end to last year reinforced officials at the Fed who are pushing to maintain lenient monetary policies.
"Growth will remain too low for Fed comfort," Mr. Green said.
The Fed's interest-rate-setting committee, after a two-day meeting Wednesday, attributed the lull in growth to Superstorm Sandy and other temporary factors, noting that consumer and business investment spending -- the two main engines of the economy -- continued apace.
"Economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors," the Fed said in a statement.
"The committee completely dismissed the economic contraction," said Harm Bandholz, an economist at UniCredit Markets, suggesting the central bank -- like most other economists -- expects the economy to accelerate again this year, albeit to a still-subdued growth rate.
"The degree of the slump in government spending was a surprise," Mr. Bandholz said, noting that the drop in defense spending was the largest in four decades. "But this is not a recession."
--Dave Boyer contributed to this report.
Distributed by MCT Information Services
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