January 30, 2013

US economy shrinks for the 1st time in 3½ years

Christopher S. Rugaber / The Associated Press

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Still, with consumer spending rising, companies might have to rebuild inventories in the current January-March quarter, economists say. That could boost growth.

Wednesday's report is the first of three estimates of GDP that the government issues each quarter. GDP changes are revised by an average of 1.3 percentage points between the first and third estimate. That means the final figure for the fourth quarter might show either growth or a steeper contraction.

A big question for 2013 is how consumers will react to the expiration of the Social Security tax cut. Congress and the White House allowed the temporary tax cut to expire in January but reached a deal to keep income taxes from rising on most Americans.

The tax increase will lower take home pay this year by about 2 percent. That means a household earning $50,000 a year will have about $1,000 less to spend. A household with two high-paid workers will have up to $4,500 less.

Already, a key measure of consumer confidence plummeted this month after Americans noticed the reduction in their paychecks, the Conference Board reported Tuesday.

Several trends are expected to boost growth later this year.

Home builders are stepping up construction to meet rising demand. That should create more construction jobs.

And home prices are increasing steadily. That makes Americans feel wealthier and more likely to spend. Housing could add as much as 1 percentage point to economic growth this year.

In addition, auto sales reached their highest level in five years in 2012. That's boosting production and hiring at U.S. automakers and their suppliers.

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