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U.S. GDP Contraction Threatens to End Rally

Posts by Ian Wyatt

Wall Street doesn’t like surprises – especially when the surprise is that the U.S. economy contracted for the first time since the tail end of the recession.

U. S. GDP shrank in the final three months of 2012, declining 0.1%. Economists were expecting 1% GDP growth.

GDP – or gross domestic product – is the measure of goods and services a nation’s economy produces. The October-December contraction comes as even more of a surprise after GDP grew 3.1% in the previous quarter.

Investors aren’t taking the news lightly. All three major U.S. indices were down roughly a quarter of a percent as of 10:45 ET this morning. If it holds, it would be just the second pullback in the S&P 500 in the last two weeks.

Still, with the indices already at five-year highs, today’s pullback amounts to a slap on the wrist. The real test may come after the current quarter.

If the U.S. economy contracts again, then a rather disturbing trend will have developed and stocks may be in for a sizable correction. If GDP growth returns, then the holiday quarter may be deemed an anomaly – a momentary speed bump in America’s return to prosperity.

The good news is that, despite the fourth-quarter contraction, the U.S. economy still grew at a faster rate in 2012 than the previous year. U.S. GDP was up 2.2% last year, up from 1.8% growth in 2011.

It’s too early to press the panic button. But today’s news should at least serve as another reminder – as if the fiscal cliff or debt ceiling weren’t enough of a reminder – that the U.S. economy has yet to fully recover from the worst recession since the Great Depression.