U.S. economy shrinks 0.1%

The U.S. economy unexpectedly shrank from October through December, the first quarterly drop since 2009 and a reminder of the economy’s vulnerability as automatic cuts in government spending loom.

The Commerce Department said the economy shrank at an annual rate of 0.1 percent mainly because companies restocked at a slower rate and the government slashed defense spending. Those trends partly reflected uncertainty late last year about the fiscal cliff, which Congress averted in a deal reached Jan. 1.

Economists say those factors could prove temporary, and the likelihood of another recession appears remote. Still, the sharp slowdown from the 3.1 percent annual growth rate in the July-September quarter, also driven by a drop in U.S. exports, raised concerns about 2013.

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 over 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 2011’s growth of 1.8 percent. For 2013, analysts generally think 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.”

A private survey released Wednesday shows U.S. businesses increased hiring in January compared with a revised December reading.

Payroll processor ADP said Wednesday that employers added 192,000 jobs in January. That is more than December’s revised number of 185,000, which had initially been reported at 215,000.

The ADP report is derived from actual payroll data and tracks total nonfarm private employment each month. The increase in hiring occurred after Congress and the Obama administration reached an agreement on Jan. 1 to avoid sharp tax increases and across-the-board government spending cuts.

The ADP report showed that most of the gains came from small businesses with 49 or fewer employees. This group of firms added 115,000 jobs in January. Medium businesses, those with 50 to 499 employees, added 79,000 jobs during the month while large businesses cut 2,000 employees.

The plunge in defense spending in the October-December quarter followed a jump in the third quarter.

The fluctuation might have reflected higher-than-usual spending that occurred in the July-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.

Last week, General Dynamics blamed a $2 billion loss in the fourth quarter on “slowed defense spending.”

Exports fell by the most in nearly four years, a result of Europe’s recession and slower growth in China and some other large developing countries.

Incomes, though, jumped last quarter as companies paid out special dividends and bonuses ahead of expected tax increases in 2013.

Commerce estimated that businesses paid nearly $40 billion in early dividends. After-tax income, adjusted for inflation, rose 6.8 percent, the most in nearly four years.

Superstorm Sandy likely also dragged on growth by closing factories, disrupting shipping and shutting down retail stores. While the department did not specify Sandy’s effect on GDP, it estimated that Sandy destroyed about $36 billion in private property and $8.6 billion in government property.

Subpar economic growth has held back hiring. The economy has added about 150,000 jobs a month, on average, for the past two years. That’s barely enough to reduce the unemployment rate, which has been a still-high 7.8 percent for two months.

Still, with consumer spending rising, companies might have to rebuild inventories in the current January-March quarter, economists say. That could boost growth.

A big question for 2013 is how consumers will react to the expiration of the Social Security tax cut. Congress and the White House allowed the temporary tax cut to expire in January but prevented income taxes from rising for most Americans.

The Social Security tax increase will reduce take-home pay this year by about 2 percent.

A household earning $50,000 a year will have about $1,000 less to spend. A household with two high-paid workers will have up to $4,500 less.