The economy in the U.S. unexpectedly shrank in the fourth quarter, restrained by the biggest plunge in defense spending in four decades and dwindling inventory growth as household purchases picked up.

Gross domestic product, the volume of all goods and services produced, dropped at a 0.1 percent annual rate, weaker than any economist forecast in a Bloomberg survey and the worst performance since the second quarter of 2009, when the world's largest economy was still in the recession, Commerce Department figures showed today in Washington. A decline in government outlays and smaller gain in stockpiles subtracted a combined 2.6 percentage points from growth.

Bolstered by a drop in fuel prices and the biggest gain in incomes in four years, consumer spending accelerated as the biggest part of the economy overcame superstorm Sandy, a bitter presidential contest and Washington budget battles. The gain in spending may be difficult to sustain this quarter as a tax increase takes a bigger chunk from pay, one reason why Federal Reserve policy makers, meeting today, are projected to press on with plans to pump money into the world's largest economy.

"The number isn't as bad as it looks," said Paul Edelstein, director of financial economics at IHS Global Insight in Lexington, Massachusetts, whose team projected a 0.3 percent gain, the lowest in the Bloomberg survey. "This really was a story about a payback in national defense spending. Consumer spending growth picked up, fixed investment was fairly strong."

David Fuller's view Special factors from hurricane Sandy to the 'fiscal cliff' and election uncertainties aside, this is a sobering result for an economy receiving 85 $billion in quantitative easing (QE) per month. My guess is that the US economy will recover sufficiently in the first quarter of 2013 to avoid a recession, defined as two consecutive quarterly contractions. Nevertheless, GDP growth in Q1 will be insufficient to check the US Government's surging debt levels. (See also my response to the email below.)


The weaker US economic data helped to trigger some short covering and renewed interest in gold and silver today. However, they need to break decisively above $1700 and $32.50 to signal that their chart patterns are improving within the current ranges.

I expect to see this despite some drifting away from precious metals due to the recent surge of interest in stock markets. More importantly, bubble conditions in so-called 'safe havens' such as US Treasuries and US 10 Year TIPS are pushing up yields and causing some shift away from government bonds. This too could revive interest in gold and silver.

Meanwhile, palladium is the first of futures-traded precious metals to break up out of its lengthy trading range. Since none of them have broken down out of these ranges, this improves the odds that platinum will be the next to break up out of these ranges, followed by silver and gold at approximately the same time.