by Xinhua Writer Jiang Xufeng
WASHINGTON, Jan. 30 (Xinhua) -- U.S. Federal Reserve on Wednesday reaffirmed its pledge to bolster economic growth, as U.S. economy contracted for the first time in about three years amid signs that Hurricane Sandy and steep government spending cuts have disrupted economic activity.
FIRST CONTRACTION IN 3 YEARS
U.S. real gross domestic product (GDP) unexpectedly declined 0. 1 percent in the fourth quarter of 2012, the first time that the world's largest economy shrank since the second quarter of 2009 when the economy was still in recession, worse than most investors ' forecasts.
The contraction was mainly caused by sharp federal government spending cuts and a slower pace of business inventories, after the economy registered a strong growth of 3.1 percent in the third quarter last year.
Real federal government consumption expenditures and investment shed 15 percent in the fourth quarter, in contrast to an increase of 9.5 percent in the third quarter. Federal defense purchases dropped at an annual rate of 22.2 percent in the fourth quarter, the largest quarterly decline in four decades,U.S. Commerce Department figures revealed on Wednesday.
The change in real business inventories subtracted 1.27 percentage points from the fourth-quarter change in real GDP after adding 0.73 percentage point to the third-quarter change. Slower inventory growth and government spending meant that factories would likely have less orders in coming months.
However, several other key components of GDP including personal consumption continued making positive contributions to growth last quarter, and the nation has seen the third consecutive year of economic expansion, Alan Krueger, Chairman of the White House Council of Economic Advisers, on Wednesday said in a blog article after the release of the widely-scrutinized data.
Real personal consumption expenditures rose 2.2 percent in the fourth quarter, compared with a gain of 1.6 percent in the third quarter. Personal consumption accounted for about 70 percent of the total economic activity in the world's largest economy.
U.S. economy posted a modest growth of 2.2 percent for the full year in 2012, a welcome acceleration from 1.8 percent in 2011, but slower than 2.4 percent in 2010.
MONETARY EASING CONTINUES
The unexpected quarterly economic dip represented a political olive branch to officials at U.S. central bank and the White House who advocated more monetary and fiscal stimulus moves to shore up the anemic economic recovery.
After wrapping up its two-day policy meeting, the Federal Open Market Committee (FOMC), the Fed's powerful interest rate setting panel, announced to stick to the current ultra-loose monetary policy to support economic growth, as the nation's economic activity came to a halt.
The nation's growth in economic activity "paused" in recent months, in large part because of weather-related disruptions and other transitory factors, top Fed policymakers said hours after the release of the GDP data.
To beef up U.S. economic growth, the central bank will continue purchasing additional agency mortgage-backed securities at a pace of 40 billion U.S. dollars per month and longer-term Treasury securities at a pace of 45 billion dollars per month, an ultra- loose monetary policy announced last month to expand the ongoing third round of quantitative easing program (QE3).
Since the onset of the financial crisis, the Fed has launched three rounds of quantitative easing (QE) programs, known as QE1, QE2 and QE3 and has thus far completed the first two rounds of the QE programs.
With QE1 and QE2, the Fed has bought more than 2 trillion dollars of Treasury securities and mortgage-backed securities, expanding its balance sheet to around 2.9 trillion U.S. dollars and attracting sharp criticism both at home and abroad.
However, some economists believed that with the ongoing government fiscal austerity and weak business investment confidence in the United States, the Fed's monetary stimulus measures were critical to sustain the economic growth.
BALANCED FISCAL POLICY
A likely explanation for the sharp government spending cuts is uncertainty concerning the automatic spending cuts that were scheduled to take effect in January, and are currently scheduled to take effect on March 1st, explained Krueger.
Although U.S. lawmakers inked a last-minute deal to avert the so-called "fiscal cliff," namely a combination of tax hikes and government spending cuts poised to take effect at the start of this year, a cloud of uncertainty was hanging over the economy in the final quarter of last year, experts held.
The U.S. economic recovery is still precarious, and Congress could blow it up, contended Justin Wolfers, a nonresident senior fellow at the Brookings Institution.
In the daily briefing on Wednesday, White House spokesman Jay Carney laid blame for the economic contraction on Republican lawmakers, saying that the political brinkmanship caused by GOP lawmakers is a "major headwind" for U.S. economic recovery and American taxpayers.
The latest GDP report is a reminder of the importance of the need for Congress to "act to avoid self-inflicted wounds to the economy." The Obama administration urged Congress to move toward a sustainable federal budget that balances revenue and spending, while making critical investments in the economy that promote growth and job creation, Krueger stressed.