US economy surprisingly shrinks for first time in 3 years, decline seen temporary

The US economy unexpectedly contracted in the fourth quarter, but analysts said there was no reason for panic given that consumer spending and business investment picked up.

Gross domestic product fell at a 0.1 percent annual rate, its weakest performance since the economy emerged from recession in 2009, the Commerce Department said on Wednesday.

If it were not for the hit from slower inventory growth and the deepest plunge in defense spending in 40 years, the economy would have grown at a respectable 2.5 percent rate. In addition, economists said Superstorm Sandy, which struck the East Coast in late October may have reduced GDP by about half a point.

"Obviously, the headline number is a bit jarring, but the underlying details of the report, by and large, are consistent with an economy that is growing probably at a trend basis of about two percent," said Michael Hanson, a senior economist at Bank of America Merrill Lynch in New York.

Economists polled by Reuters had expected GDP to rise at a 1.1 percent rate and none had predicted a contraction. While many were surprised by the drop in output, they were heartened by the acceleration in consumer spending and rebound in business investment, which pointed to some fundamental economic strength.

A second report, from payroll processor ADP, showed private-sector payrolls expanded by 192,000 jobs in January after increasing 185,000 in December, which also suggested the recovery's fundamentals were sound.

Faster jobs growth could help the economy weather the headwind of higher taxes and possible spending cuts. A payroll tax cut expired on Jan. 1 and big automatic spending cuts are set to take hold in March unless Congress acts.

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