WASHINGTON -- The U.S. economy shrank unexpectedly late last year, a reminder of the biggest threat it faces in 2013: sharp government spending cuts and prolonged political budget fights.
A plunge in defense spending helped push the economy into negative territory for the first time since mid-2009. The contraction in the October-December quarter came in at an annual rate of 0.1 percent, according to a government estimate released Wednesday.
The likelihood of another recession appears remote. The economy is forecast to grow around 2 percent this year as strength in areas like housing and auto sales could partly offset government cutbacks. Investors appear unfazed, too: The stock market has surged more than 6 percent this year and is nearing an all-time high.
But economists warn that further spending cuts would weaken a still-precarious recovery.
"One way or the other, government is going to be a constraint on growth," said James Marple, senior economist at TD Bank.
Deep spending cuts in defense and domestic programs are set to kick in March 1. Most of the federal government could shut down March 27 if Congress doesn't extend a temporary measure authorizing funding. And the nation's borrowing limit must be raised by May 18 or the government could default on its debts.
A sputtering economy could weaken President Barack Obama's hand in dealing with Congress and complicate his efforts to push forward on other domestic priorities, such as immigration reform and gun control.
The Commerce Department said the economy shrank last quarter mainly because companies restocked at a slower rate and the government slashed defense spending. Exports also fell.
Economists say some of those factors could prove temporary. Still, the slowdown from the 3.1 percent annual growth rate in the July-September quarter was unexpectedly sharp. For all of 2012, the economy expanded 2.2 percent, better than 2011's growth of 1.8 percent.
The Federal Reserve referred to the fourth-quarter slowdown Wednesday in a statement after a policy meeting.
The U.S. economy appears to have "paused in recent months," the Fed said, mainly because of temporary factors. The central bank said growth would likely resume this year. But it reaffirmed its commitment to stimulating the economy by keeping borrowing costs low for the foreseeable future.