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US Economy Shrinks 0.1 Pct., 1st Time In 3 ½ Years

The Federal Reserve referred to the fourth-quarter slowdown Wednesday in a statement after a policy meeting. The U.S. economy appears to have "paused in recent months," the Fed said, mainly because of temporary factors. The central bank said growth would likely resume this year. But it reaffirmed its commitment to stimulating the economy by keeping borrowing costs low for the foreseeable future.

Looming government cutbacks may already have hindered the economy: Concern over the year-end fiscal cliff could be one reason businesses slowed their restocking. And defense spending may have fallen as agencies prepared for automatic spending cuts. Congress managed to avert the fiscal cliff but only postponed the start of automatic spending cuts until March 1.

The drag from the government comes as private-sector growth is picking up. Consumers and businesses spent more in the October-December quarter compared with the July-September quarter.

Consumer spending, which drives about 70 percent of the economy, added 1.5 percentage points to growth last quarter. Business investment and home construction contributed, too.

But government spending cuts and slower company restocking, which can fluctuate sharply, subtracted a combined 2.6 percentage points from GDP. And a drop in exports subtracted an additional quarter-point.

Defense spending plummeted more than 22 percent, the steepest drop in more than 40 years. Nearly all those cuts were in services, such as weapons maintenance and personnel support. The Defense Department said spending fell in part because of the drawdown in forces from Iraq and Afghanistan.

The deal Congress reached with the White House to avoid the fiscal cliff delayed spending cuts of about $85 billion. Yet those cuts appear likely to take place eventually. Congressional Republicans see them as a way to force Democrats to make budget concessions.

At the same time, Americans are coming to grips with an increase in Social Security taxes that is leaving them with less take-home pay. The lower pay could cut roughly a half-point off growth this year, economists say. The automatic spending cuts, if they take place, could subtract an additional 0.3 percentage point, Marple estimates.

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