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US economy unexpectedly shrinks in Q4

Wednesday, January 30 14:20:02

The U.S. economy unexpectedly contracted in the fourth quarter, suffering its first decline since the 2007-09 recession as businesses scaled back on restocking and government spending plunged.

Gross domestic product fell at a 0.1 percent annual rate after growing at a 3.1 percent clip in the third quarter, the Commerce Department said today.

That was the worst performance since the second quarter of 2009, when the recession ended, and showed the economy entering the new year with no momentum.

The contraction, coming against a backdrop of tightening fiscal policy, could spur fears of a new recession and create an urgency for policymakers to deal with outstanding budget issues.

Economists polled by Reuters had expected output to increase at a 1.1 percent rate.

None of the economists surveyed had predicted a contraction.

A pick-up in consumer spending and a rebound in business investment, however, curbed the slide in output and offered some hope for the recovery, which will be severely tested as Washington tightens its belt.

The data was published as officials at the Federal Reserve wrap-up a two-day meeting. The report will likely provide ammunition for officials at the U.S. central bank to stay on their ultra-accommodative policy stance.

Economists say a growth pace in excess of 3 percent would be needed over a sustained period to significantly lower high unemployment. The economy has struggled to hold above a 2 percent growth pace.

For the whole of 2012 the economy grew 2.2 percent.

The economy was slammed by a monster storm in late October, which caused extensive damage along the East Coast, which was expected to have cut around 0.5 percentage point off fourth-quarter growth.

The recovery also had to deal with uncertainty over the so-called fiscal cliff of scheduled tax hikes and budget cuts, which hurt confidence even though data suggests that households and businesses largely shrugged off the worries. (C ) Reuters