U.S. Economy Shrinks in Q4, Military Spending Plunges 22%

Nichole Harper
30 Jan, 2013
New York City

Stocks in New York traded sideways after economy shrank unexpectedly in the fourth quarter on the decline in government spending and a sharp fall in military spending.

[R]11:25 AM New York – Stocks in New York traded sideways after economy shrank unexpectedly in the fourth quarter on the decline in government spending and a sharp fall in military spending.[/R]

Stocks were on the defensive after the U.S. economy unexpectedly shrank in the fourth quarter.

The mood in trading was tentative after the GDP shrank for the first time since the 2007-2008 recession ahead of the announcement from the Federal Reserve Bank later today at 2:15 p.m. ET.

The euro jumped to $1.3552 and reached a 14-month high on the speculation that the Fed will be forced to keep rates low and offer more incentives to revive the economic growth.

Q4 GDP Shrinks

The U.S. economy shrank at annual rate of 0.1% in the final quarter of 2012 after growing at 3.1% in the third quarter. The quarterly performance was hurt by weaker exports, slower increase in inventories and a drop in military spending.

The quarterly performance was the worst since the second quarter of 2009.

Third quarter increase was largely driven by the rise in inventories build up and the partial pull back was expected by most investors but the magnitude of the decline surprised most economists.

Government spending declined 6.6% and defense spending dropped 22.2%, the largest fall in defense spending since 1972. Government spending subtracted 1.33 percentage points from growth.

Economic activities were hampered by the Hurricane Sandy on the East Coast and economists estimated the storm to cut the activities by 0.5 percentage point. In addition, the businesses were reluctant to increase capital spending with the protracted debt negotiations in Washington.

For the year 2012, the economy grew at 2.2%.

Economists polled by Ticker.com had anticipated increase between 0.4% and 1.3% annual rate.

The data from the Commerce Department are scheduled to be revised in February and March and economists are anticipating first quarter economic growth of 1.4% annual rate.

However, consumer spending increased at 2.2% rate and accelerated from the 1.6% rate in third quarter.

Stocks in Review

Amazon.com, Inc. ((AMZN)) climbed 3.6% or $9.56 to $269.92 after the online retailer said net sales in the fourth quarter ending in December climbed 22% to $21.27 billion from $17.43 billion in the same period of last year.

Net income in the quarter declined 45% to $97 million or 21 cents per diluted share compared to $177 million or 38 cents a share a year ago earlier.

The retailer expects first quarter net sales between $15 billion and $16.6 billion, or increase 14% to 26% and between operating loss of $285 million and income of $65 million.

Eli Lilly and Company ((LLY)) gained 17 cents to $54.49 after the pharmaceutical company reported total revenue in the fourth quarter ending in December slid 1% to $5.96 billion from $6.05 billion in the same period of last year. Net income in the quarter slipped 4% to $827.2 million or 74 cents per diluted share compared to $858.2 million or 77 cents a share a year ago period.

The company revised its 2013 financial guidance and expects full year earnings per share in the range of $4.10 to $4.25, an increase of 12% to 16%, and revenues between $22.6 billion and $23.4 billion.

L-3 Communications Holdings, Inc. ((LLL)) rose 30 cents to $78.19 after the aerospace and defense contractor stated net sales in the fourth quarter ending in December edged up to $3.56 billion from $3.54 billion in the same period of last year. Net income in the quarter dropped 23% to $212 million or $2.25 per diluted share compared to $274 million or $2.72 a share a year ago quarter.

The government contractor expects net sales for the fiscal 2013 between $12.55 billion and $12.75 billion and diluted earnings per share in the range of $8.15 to $8.35.

Rockwell Automation, Inc. ((ROK)) slipped 76 cents to $89.13 after the industrial automation provider said sales in the first quarter ending in December rose 1% to $1.49 billion from $1.47 billion in the same period of last year. Net income in the quarter declined 12% to $161.4 million or $1.14 per diluted share compared to $183.3 million or $1.27 a share a year ago.

The software maker expects sales for fiscal 2013 in the range of $6.35 billion to $6.65 billion and adjusted earnings per share between $5.35 and $5.75.

The Boeing Company ((BA)) gained 58 cents to $74.25 after the aerospace company reported total revenue in the fourth quarter ending in December jumped 14% to $22.3 billion from $19.6 billion in the same period of last year. Net income in the quarter dropped 30% to $978 million or $1.28 per diluted share compared to $1.39 billion or $1.84 a share a year ago

For fiscal 2013, the company expects revenue between $82 billion and $85 billion and earnings per share in the range of $5 to $5.20.