The fourth quarter period was dominated by the “fiscal cliff” clash between the White House and Republicans in Congress
House of Representatives speaker, John Boehner, Ohio Republican
The fourth quarter period was dominated by the “fiscal cliff” - the spending cuts and tax rises that had been due to come into force from 1 January. These were avoided by a last-minute deal between the Republican-dominated Congress and the White House. However, economists warned at the time that fears of an abrupt cut in government spending were undermining business and consumer confidence.
However, part of that deal includes tax rises for the highest-earning Americans and - more significantly for the economy - the expiry of a payroll tax holiday for all US employees, something which is widely expected by economists to further weigh on growth during the current quarter.
The fourth quarter shrinkage in economic output comes as a shock to analysts on Wall Street, who had been expecting 1.1% growth according to a poll by news agency Reuters. Not one economist surveyed had predicted an economic contraction.
It will add to pressure on the US Federal Reserve to do more to stimulate the economy. Members of its Federal Open Markets Committee are due to announce the conclusions of their latest policy-setting meeting later and will have had an advance look at the economic data.
Growth was dragged down by public spending cuts - notably a 22% reduction in federal defence spending - and by the decision of many businesses to halt the rapid rebuilding of their inventories that began over the summer.
However, consumer spending did pick up, as did business investment, suggesting that the economy may have some underlying momentum. Sales of computers and cars both made positive contributions to the economy's performance.
Residential investment also grew 15%, adding to evidence that the housing market has finally turned the corner.
Growth for 2012 as a whole came in at 2.2%, up from 1.8% in 2011, but still unusually slow compared with previous economic recoveries in the US following recessions in the post-War era.
The recently re-elected President Barack Obama and Congress are expected to clash once again in the coming months over the debt ceiling. The US Treasury is approaching the 16.4tn dollars legal limit on its total debt, and must gain permission from Congress to borrow the money needed for it to continue meeting its bills.
Last time there was a stand-off over the issue, in the summer of 2011, the political deadlock prompted ratings agency Standard & Poor's to deprive the US of its top AAA rating, a move that sent stock markets sharply lower.
The US House of Representatives has passed a bill to extend the country's debt limit until May, deferring the budget debate for a few months at least. (BBC).-
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