Surprise: Economy Contracts by 0.1% in Fourth Quarter 2012

The U.S. Commerce Department’s Bureau of Economic Analysis surprised most economists by announcing that the gross domestic product in the fourth quarter of 2012 contracted by 0.1 percent. GDP growth measured 3.1 percent in the third quarter.

The BEA did emphasize that Wednesday’s reading was the first preliminary estimate and that revisions would likely be coming once more data is analyzed. The BEA releases three GDP measure for each quarter: a preliminary estimate, a revised estimate, and a final reading. The revised estimate is due at the end of February.

Commerce’s caution in the number is tied to the fact that two large extraordinary forces drove down the GDP in the fourth quarter: defense spending fell 22 percent and private businesses inventories grew 66 percent slower than in the previous quarter, bringing the GDP down 1.27 percentage points alone.

But while businesses were drawing down inventories – which subtracts from GDP because it indicates firms are not manufacturing as much – there was a 8.4 percent increase in nonresidential fixed investment in the fourth quarter, in contrast to a decrease of 1.8 percent in the third. The business fixed asset investment increase was driven by a 12.4 percent increase in equipment and software investments.

Consumer spending was also up in fourth quarter of 2012. Real personal consumption expenditures increased 2.2 percent in the fourth quarter, compared with an increase of 1.6 percent in the third.

For the full year, the BEA said that Real GDP increased 2.2 percent in 2012, compared with an increase of 1.8 percent in 2011.

Analysts and economists had expected the economy to cool off in the fourth quarter after growing at a relative robust 3.1 percent rate in the third quarter. Most predictions saw Q4 2012 growth of around 1.1 percent, making the slight contraction reported Wednesday a surprise.