Yikes:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — decreased at an annual rate of 0.1 percent in the fourth quarter of 2012 (that is, from the third quarter to the fourth quarter), according to the “advance” estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 3.1 percent. The Bureau emphasized that the fourth-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 4 and the “Comparisons of Revisions to GDP” on page 5). The “second” estimate for the fourth quarter, based on more complete data, will be released on February 28, 2013. The decrease in real GDP in the fourth quarter primarily reflected negative contributions from private inventory investment, federal government spending, and exports that were partly offset by positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased.

Most economists predicted that the economy slowed in Q4, but I don’t know that anyone expected a negative number. Business Insider notes that the expectations were around 1.1% for Q4, which would have been a big drop in itself from Q3’s 3.1%. However, they point to the contraction in federal spending as the main culprit:

Real federal government consumption expenditures and gross investment decreased 15.0 percent in the fourth quarter, in contrast to an increase of 9.5 percent in the third. National defense decreased 22.2 percent, in contrast to an increase of 12.9 percent. Nondefense increased 1.4 percent, compared with an increase of 3.0 percent. Real state and local government consumption expenditures and gross investment decreased 0.7 percent, in contrast to an increase of 0.3 percent.

Well, it’s true that government spending dropped in Q4, but it’s equally true that it spiked in Q3. That’s a decrease from the spike, which makes it a lot less dramatic when put in context. Exports took a beating, too, and that has nothing to do with government spending:

Real exports of goods and services decreased 5.7 percent in the fourth quarter, in contrast to an increase of 1.9 percent in the third. Real imports of goods and services decreased 3.2 percent, compared with a decrease of 0.6 percent.

However, there is a mild bright spot in inventories:

Real final sales of domestic product — GDP less change in private inventories — increased 1.1 percent in the fourth quarter, compared with an increase of 2.4 percent in the third.

In other words, much of this drop seems to be a lack of inventory expansion. Real final sales to end purchasers rose, even if it didn’t go up by much. That would indicate that inventory expansion in Q3 and prior periods was based on overly-optimistic views of the economy.

The New York Times breaks out the U-word in its headline, although at this point they don’t have a story to go along with it. The Associated Press says, “Surprise!”:

The U.S. economy posted a stunning drop of 0.1 percent in the fourth quarter, defying expectations for slow growth and possibly providing incentive for more Federal Reserve stimulus. The economy shrank from October through December for the first time since the recession ended, hurt by the biggest cut in defense spending in 40 years, fewer exports and sluggish growth in company stockpiles. The Commerce Department said Wednesday that the economy contracted at an annual rate of 0.1 percent in the fourth quarter. That’s a sharp slowdown from the 3.1 percent growth rate in the July-September quarter. The surprise contraction could raise fears about the economy’s ability to handle tax increases that took effect in January and looming spending cuts.

What’s perhaps more stunning is the idea that the so-called recovery in its fourth year still cannot stand on its own legs without massive government stimulus. After all, federal spending has remained at the $3.8 trillion level for four years, with its percentage of GDP around 25%, far above the 20% post-1960s norm. Perhaps that’s part of the reason that the economy is still stagnating, rather than a reason to expect recovery.

Update: Here’s a couple of good questions:

GDP Fell .1% In 4th Qtr 2012: Will Obama Blame Fox or Bush?: Is this the start of a recession… goo.gl/fb/NDBuB — Jeff Dunetz (@yidwithlid) January 30, 2013

A recession is defined by two success quarters of contraction, and we should remember that this is the advance estimate of Q4. These numbers go through two more iterations; the final number will come out in March. I’d guess based on the real final sales numbers that we aren’t going to see two negative quarters in a row, but it’s possible — and the tax hikes won’t help. To answer the other question, another recession will be squarely blamed on the White House, especially after all the bragging they did about winning the fiscal-cliff standoff.

Update II: The year-end GDP number was 2.2%, assuming no further adjustments in Q4 GDP. That’s better than 2011’s 1.8% GDP growth … but not by much.