Military cuts undermine Fed's push for growth

THE recovery in the US economy stalled late last year as cuts in military spending and other factors overwhelmed the Federal Reserve's campaign to stimulate growth.

THE recovery in the US economy stalled late last year as cuts in military spending and other factors overwhelmed the Federal Reserve's campaign to stimulate growth.

The economy contracted at an annual rate of 0.1 per cent in the final three months of 2012, the worst quarter since the last recession, hampered by the lower military spending, fewer exports and smaller business stockpiles, preliminary data indicated on Wednesday.

The Reserve, in a separate appraisal, said economic activity "paused in recent months".

Still, economists said the seemingly bleak gross domestic product report was not a sign another recession was looming. The data showed relatively strong spending by consumers and businesses, even as military spending posted its sharpest quarterly drop in 40 years.

Forecasters expect growth this year will rebound to 1.5 per cent, a little lower than the pace it has managed over the last three years.

"This is the tip of the iceberg on fiscal austerity from Washington," the co-head of global economics research at Bank of America Merrill Lynch, Ethan Harris, said. "It was exaggerated this quarter by the unusually large drop in defence spending but that and higher taxes will start hurting" in coming months.

The drop in exports stemmed in part from a fall in growth in Europe, where governments have also cut spending in a bid to balance budgets.

The parallel contractions are likely to provide fodder for economists who argue austerity efforts have gone too far in many developed economies.

The weak numbers could also force politicians to limit the cuts scheduled to take effect if Congress fails to produce a budget bargain in the coming weeks, and strengthen the argument that deficit reduction is a lesser concern than job creation.

The Reserve said it would continue its efforts to revive growth by holding short-term interest rates near zero and increasing its holdings of Treasury securities and mortgage-backed securities. Those policies aim to reduce borrowing costs for businesses and consumers.

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