The U.S. economy didn’t shrink at the end of last year after all, according to revised government data released Thursday, but it barely grew.
The updated estimate of the nation’s gross domestic product showed it expanded at an annual rate of 0.1 percent during the fourth quarter — just above stall speed. Though tepid growth is better than none at all, the report still shows a fragile recovery that has been too weak to make a significant dent in the nation’s unemployment rate. The adjustment was also smaller than some economists had hoped for.
“While today’s release has revised the direction of change in real GDP, the general picture of the economy for the fourth quarter remains largely the same as what was presented last month,” the Commerce Department said in its report.
Federal number-crunchers had previously calculated that the nation’s gross domestic product shrank by an annual rate of 0.1 percent during the fourth quarter of 2012. Cuts in defense spending and a drop-off in business inventories fueled an apparent decline — the first since the recession ended in 2009.
The estimate was the government’s first stab at calculating GDP for that quarter, and the total is typically revised several times before the final figure is set. Economists predicted that later estimates would be higher and noted several bright spots in the report, including a steady rebound in housing and consumer spending.
“It didn’t look too good on the surface, but it had a pretty good personality,” said Mark Vitner, an economist with Wells Fargo.
Thursday’s revised estimate was the result of an improvement in exports. Government figures previously showed they had declined 5.7 percent from the third quarter amid turmoil in Europe. That was revised to a 3.9 percent dip on Thursday. Meanwhile, imports did not subtract as much from growth.
However, business inventories fell more than had been estimated. The decline held back growth by 1.6 percentage points.
But perhaps more important is what did not change: the impact of government spending cuts.
The biggest hit to GDP growth came from a double-digit plunge in federal spending, driven by a 22 percent drop in defense during the fourth quarter. That sector alone dragged down growth by 1.3 percentage points.
The decline followed a large jump in spending during the previous quarter. Economists said the dramatic swing may have been due partly to the cyclical nature of defense spending and partly due to preparations for across-the-board cuts known as sequestration scheduled to begin Friday.
The good news is that economists believe that the recovery has since picked up again. The Federal Reserve described the fourth quarter as simply a “pause” in economic activity. Some analysts are forecasting GDP growth at a 2 percent annual rate or higher this quarter.
There are notable signs of life in the economy. The number of people filing for unemployment benefits for the first time fell 344,000 this week, down 22,000 from the previous week, according to data released Thursday. That was a bigger drop than economists had anticipated and a hopeful sign for the labor market. In addition, consumer spending has remained robust despite the threat of higher taxes. An analysis released Thursday by the New York Fed found that consumer debt increased slightly at the end of last year , the first uptick since 2008. Officials said it could signal that households have finally reduced their debt to more manageable levels. Delinquency rates have returned to pre-recession levels of about 8.5 percent of accounts.
“The data provides early evidence that consumers may be reaching the end of the four year deleveraging cycle, though we’ll need to see if this is sustained in upcoming quarters,” said Andrew Haughwout, vice president and economist at the New York Fed.
And stock markets flirted with record highs on Thursday. After a few giddy hours, the major indexes ended the day mostly flat. The Dow Jones industrial average closed at 14,054, down about 0.2 percent, while the broader Standard & Poor’s 500-stock index finished at 1,515, down 0.1 percent.
Though Wall Street has been heating up, Washington is counting down to the sequester. The Congressional Budget Office has estimated that the automatic cuts could reduce GDP growth this year by 0.6 percentage points. They also will result in 750,000 fewer jobs created or retained, the CBO said. As those cuts come closer to reality, economists are lowering their expectations for growth. Mesirow Financial chief economist Diane Swonk said she expects the impact of sequestration to phase in over several months — but the duration and the potential damage remain unclear as lawmakers continue to wrangle over compromises.
“Prospects for 2013, which could be a transitional year, are dimming as our elected officials continue to fail us by their inability to make judicious decisions about how to cut the deficit,” she said.
The final GDP estimate for the end of last year will be released March 28.