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US Economy Shrinks 0.1 Pct., 1st Time In 3½ Years

"Frankly, this is the best-looking contraction in U.S. GDP you'll ever see," Paul Ashworth, an economist at Capital Economics, said in a research note. "The drag from defense spending and inventories is a one-off. The rest of the report is all encouraging."

The plunge in defense spending in the October-December quarter followed a jump in the third quarter. The fluctuation might have reflected higher-than-usual spending that occurred in the July-September period in anticipation of government spending cuts later in the year. Some defense contractors reported lower government spending at the end of the year.

Last week, General Dynamics blamed a $2 billion loss in the fourth quarter on "slowed defense spending."

Exports fell by the most in nearly four years, a result of Europe's recession and slower growth in China and some other large developing countries.

Incomes, though, jumped last quarter as companies paid out special dividends and bonuses ahead of expected tax increases in 2013. Commerce estimated that businesses paid nearly $40 billion in early dividends. After-tax income, adjusted for inflation, rose 6.8 percent, the most in nearly four years.

Superstorm Sandy likely also dragged on growth by closing factories, disrupting shipping and shutting down retail stores. While the department did not specify Sandy's effect on GDP, it estimated that Sandy destroyed about $36 billion in private property and $8.6 billion in government property.

Subpar economic growth has held back hiring. The economy has added about 150,000 jobs a month, on average, for the past two years. That's barely enough to reduce the unemployment rate, which has been a still-high 7.8 percent for two months.

Economists forecast that unemployment stayed at that rate in January. The government will release the January jobs report Friday.

The slower growth in stockpiles followed a jump in the third quarter. Slower inventory growth means factories likely produced less. Heavy equipment maker Caterpillar Inc. said this week, for example, that it reduced its inventories in the fourth quarter as global sales declined from a year earlier.

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