The US economy unexpectedly contracted in the fourth quarter, suffering its first decline since the 2007-09 recession as businesses scaled back on restocking and government spending fell.

GDP fell at a 0.1% annual rate after growing at a 3.1% clip in the third quarter, the Commerce Department said. That was the worst performance since the second quarter of 2009, and showed the economy entering the new year with no momentum.

The contraction, coming against a backdrop of tightening fiscal policy, could spur fears of a new recession and create an urgency for policymakers to deal with outstanding budget issues.

Loading article content

Economists polled had expected output to increase at a 1.1% rate.

A pick-up in consumer spending and a rebound in business investment, however, curbed the slide in output and offered some hope for the recovery, which will be severely tested as Washington tightens its belt.

The economy was slammed by a monster storm in October, which caused extensive damage along the East Coast and was expected to have cut half a percentage point off fourth-quarter growth. The recovery also had to deal with uncertainty over the so-called fiscal cliff of scheduled tax hikes and budget cuts.