US economy unexpectedly shrinks as defence spending slumps

WASHINGTON (AP) - The US economy shrank from October through December for the first time since the recession ended, hurt by the biggest cut in defence spending in 40 years, fewer exports and sluggish growth in company stockpiles.

The Commerce Department said Wednesday that the economy contracted at an annual rate of 0.1 per cent in the fourth quarter. That's a sharp slowdown from the 3.1 per cent growth rate in the July-September quarter.

The surprise contraction could raise fears about the economy's ability to handle tax increases that took effect in January and looming spending cuts.

Still, the weakness may be because of one-time factors. Government spending cuts and slower inventory growth subtracted a total of 2.6 percentage points from growth.

And those volatile categories offset faster growth in consumer spending, business investment and housing - the economy's core drivers of growth.

Another positive aspect of the report: For all of 2012, the economy expanded 2.2 per cent, better than 2011's growth of 1.8 per cent.

The economy may stay weak at the start of the year because Americans are coming to grips with an increase in Social Security taxes that has left them with less take-home pay.

Subpar growth has held back hiring. The economy has created 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 7.8 per cent for the past two months.

Economists forecast that unemployment stayed at the still-high rate again this month. The government releases the January jobs report Friday.

The slower growth in stockpiles comes after a big jump in the third quarter. Companies frequently cut back on inventories if they anticipate a slowdown in sales. Slower inventory growth means factories likely produced less.