Congressional Republicans seem determined to permit deep cuts to defense and domestic programs to kick in as scheduled March 1. And Americans are coming to grips with an increase in Social Security taxes that has begun to leave them with less take-home pay.
Government spending cuts and slower company restocking, which can fluctuate sharply, subtracted a combined 2.6 percentage points from GDP. Those two factors offset a 2.2 percent increase in consumer spending. And business spending on equipment and software rose after shrinking during the summer.
The Federal Reserve referred to the fourth-quarter slowdown in a statement after it ended a policy meeting Wednesday. The U.S. economy appears to have "paused in recent months," the Fed said, mainly because of temporary factors. The Fed reaffirmed its commitment to stimulating the economy by keeping borrowing costs low for the foreseeable future.
For all of 2012, the economy expanded 2.2 percent, better than the previous year's growth of 1.8 percent. For 2013, analysts generally think that the economy will grow at a steady if modest pace of roughly 2 percent as the housing and auto sectors continue to recover along with bank lending and consumer spending.
"Frankly, this is the best-looking contraction in U.S. GDP you'll ever see," Paul Ashworth, an economist at Capital Economics, said in a research note. "The drag from defense spending and inventories is a one-off. The rest of the report is all encouraging."
The plunge in defense spending in the October to December quarter followed a jump in the third quarter. The fluctuation might have reflected higher-than-usual spending that occurred in the July to September period in anticipation of government spending cuts later in the year. Some defense contractors reported lower government spending at the end of the year.