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Defence cuts trigger surprise fall in US GDP

Defence cuts trigger surprise fall in US GDP

US GDP registered a surprise 0.1% fall in the final quarter of 2012 due largely to a 22% fall in national defence spending.

Ahead of the New York opening, the FTSE 100 gave up some of its day-gains on the shock, but at 14.20 was broadly flat, 0.14% off its opening at 6,330. 

Neither the fall nor the previous quarter's 12.9% spike in defence spending had been factored into Treasury notes, meaning that the sharp moves were not captured in analyst expectations.

Elsewhere however, the US economy appeared to remain strong. Consumption growth rose to 2.2%, while business investment rose 8.4%, both despite fiscal cliff uncertainty and Superstorm Sandy. Residential investment rose 15.3%.

'Frankly, this is the best looking contraction in GDP you'll ever see, said Capital Economics head US economist Paul Ashworth.

'First-quarter GDP growth is going to be pretty weak because of the expiry of the payroll tax cut. But there is nothing in these figures to change our view that US GDP growth will accelerate as this year goes on.'

Inventories deducted a further 1.3% from headline figures and exports 0.3%.

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