US Q4 Figures Reveal Contraction

Most analysts were anticipating that the world’s largest economy would produce growth of about 1.1% in the final quarter of 2012. Instead, the US economy actually contracted by 0.1% in Q4, according to an initial reading of the data (this will be revised as more figures become available) which contrasts strongly with the Q3 growth figure of 3.1%.

Business confidence is critical to economic growth. Analysts have been quick to point to the “fiscal cliff” crisis as the major reason underlying these disappointing figures. In the end, a temporary solution to the debt crisis facing the USA (which lies at the heart of the “fiscal cliff” dilemma) was found which saw the end of a “payroll tax holiday” affecting all in work and tax hikes for anybody earning over $400000. It was widely believed that a failure to beat the deadline would see mandatory spending cuts and tax rises which would probably push the USA into recession. This is not a good backdrop for businesses or individuals to commit to any expenditure that could be deferred. Indeed, the figures suggest that businesses curtailed the rapid rebuilding of their inventories which had started over the summer. The reduction in disposable income for average American families may cause a drag on economic expansion in 2013; particularly as the thorny problem of public spending cuts required to reduce debt, has yet to be resolved.

Q4 saw a 22% cut in defence spending; the steepest reduction seen since the draw-down after the Vietnam War. Together with the downturn in re-investment in business inventories, these cuts were said to have reduced the quarterly GDP figure by 2.6%. Nevertheless, the US economy was estimated to have grown by 2.2% for the full year 2012 and there are encouraging signs going forward in 2013 – however, the debt ceiling and spending cuts (now deferred to May) hang over the US economy like the albatross in the Tale of the Ancient Mariner.