GDP was essentially stagnant in last leg of 2012

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WASHINGTON -- The U.S. economy barely grew late last year, thanks largely to a plunge in federal defense spending that in part was likely preparation for the budget cuts under "sequestration."

The nation's gross domestic product, or the total value of all goods and services produced, rose by a measly 0.1 percent annual rate in the fourth quarter, according to the Commerce Department's latest calculations, released Thursday. The government's initial estimate said inflation-adjusted GDP shrank 0.1 percent in the final three months of last year.

Analysts on average were expecting the quarterly GDP growth rate to be brought up to about 0.5 percent. GDP grew by 3.1 percent annualized in the third quarter of last year.

Still, economists did seem troubled by the modest revision, noting the unusually steep 22 percent annualized fall in defense spending in the fourth quarter. The stagnant GDP rate also reflected a big slowdown in business inventories, suggesting that companies may produce more in coming months to stock up on goods that have been run down.

Also belying the overall poor GDP growth were strong numbers for business investments, particularly residential investment, which jumped 17.5 percent at an annual rate. Private spending also increased by a decent 2.1 percent, slightly better than the third quarter.

Federal Reserve Chairman Ben S. Bernanke said this week that the flattening of the GDP growth rate late last year wasn't a sign of an economy that had stalled. Rather, he attributed it to weather-related disruptions and other transitory factors.

That's the good news.

The bad news is that the economy continues to grow at a mediocre pace of about 2 percent, well below what Mr. Bernanke and other experts see as the potential for the economy and what is needed to bring down the unemployment rate more quickly.

What's more, the fiscal budget cuts set to take effect Friday under the sequester will put further weight on an economy that just can't seem to gain much speed. GDP has grown on average by a little over 2 percent a year since the Great Recession officially ended in mid-2009.

Many economists expect GDP to advance by no more than that in the first half of this year. After that, if there are no big surprises, they foresee the economy picking up momentum as the effects of tax increases and budget cuts fade and as the economy benefits from a recovering housing market and the improvement in consumer finances and credit flows.

Still, that is a big "if." There's little indication that the political budget battles will ease anytime soon, and higher oil prices and renewed concerns about the eurozone debt crisis have made the near-term outlook even more uncertain.

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