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“Information received since the Federal Open Market Committee met in December suggests that growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors,” the Federal Reserve said yesterday in a press release commenting on the contraction.
But economists are warning that the contraction should not derail overall economic growth which is expected to be between 1.5 and 2 per cent for 2013. They said strong consumer data and a resurgent housing market indicate there is no fear of a recession.
The Federal Reserve also pointed to promising figures which indicated that unemployment was steadily falling and that inflation was below forecast.
“The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate.”
However, the statement did hint at Europe’s struggling economies, some slapped with austerity measures, as a risk to US exporters.
Despite the generally positive outlook, the 0.1 per cent contraction notwithstanding, the data caused a drop in most global markets, with the Euro dipping slightly against the US dollar. Stocks in the US, which had been rallying since the beginning of year, stalled with the Dow Jones stopping – and slightly declining – just short of its record.
In the meantime, many Americans are likely to feel the pinch of the revived payroll tax, which had been cut since 2010 but failed to be included in the package agreed by Republicans and Democrats during the fiscal crisis last month.
Economists warn that this will dip into the average household’s savings and affect consumer spending throughout 2013. The effect of the payroll tax will also affect whether markets continue their January rally.