The unexpected drop in gross domestic product (GDP) during the fourth quarter belies the growth happening in business and in consumer confidence.
Economists are dismissing the report as any type of recessionary signal and instead, are focusing on the gains in auto sales, increased consumer spending, and the highest prices in housing in six years.
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Analysts described the drop as statistical noise in the defense and inventory components.
Looking at the average pace of growth over the second quarter would give a more accurate view.
That would yield a growth rate of 1.5%, right in line with the growth rate of recent years.
After-tax income for consumers rose at a 6.8% annual rate from October through December and the largest increase since the second quarter of 2008.
Some companies also paid dividends and bonuses earlier than usual before tax rates went up.
That very tax increase may eat into consumer spending during the first quarter but another report showed that companies hired more workers than expected in January, signifying
progress in the labor market early in the year.
Government outlays decreased at a 6.6% annual pace October through December, led by a 22.2% decrease in military spending.
It is the largest decrease in defense spending
since 1972 during the at the end of the Vietnam era.
Inventories grew at a $20 billion annual rate, down from the $60.3 billion pace of the third quarter.
Defense spending cut 1.3% from GDP; the drop in inventories cut another 1.3%.