A 22.2% reduction in defense spending derailed growth in the U.S. gross domestic product for the fourth quarter of 2012. Real GDP fell by 0.1% in the quarter after a 3.1% increase in the third quarter.
“There is little doubt that the outsized decline in defense spending was due to uncertainty in the Department of Defense over the effect of sequestration on their budget over the next year,” said James Marple, senior economist for TD Economics. “Defense spending was front-loaded into the third quarter in the face of sequester uncertainty, and the fourth quarter reflects pay-back.”
But economists said the slowdown was more a blip than a prelude to recession, and pointed to continuing growth in the economy from consumer demand and businesses. While cautious about the defense situation, Marple said the other two major drags on fourth quarter growth, net trade and inventories, “should reverse course and contribute to growth in the year ahead.”
“For the first half of 2013, we do not envisage a very strong acceleration in economic growth as the restraining economic forces remain in place, including fiscal policy tightening and ongoing uncertainty,” said Kathy Bostjancic, an economist at the Conference Board. “However, there are reasons for hope in the second half of the year as the fiscal drag wanes and housing, which long created a drag on the economy, continues to turn from a headwind to a tailwind.”