30 January 2003, 17:12  U.S. Economy Expanded at a 0.7% Annual Rate in Fourth Quarter

Washington, Jan. 30 (Bloomberg) -- The U.S. economy grew at a slower-than-expected pace from October to December, restrained by the weakest consumer spending in almost a decade. Gross domestic product, the sum of all goods and services produced in the U.S., expanded at a 0.7 percent annual rate, the slowest since the third quarter of 2001, when the nation was in recession. The economy grew at a 4 percent pace in the third quarter. While the slowdown may raise questions about a possible double-dip recession, economists said consumer spending likely would rebound in the first three months of 2003. Federal Reserve policy makers kept the nation's benchmark interest rate at a 41- year low yesterday and President George W. Bush has proposed a $670 billion plan to stimulate growth. ``We will be doing much better by the middle of the year,'' said Carl Tannenbaum, chief U.S. economist at LaSalle Bank in Chicago, before the report. ``We have very, very low interest rates, it's likely that we will get some kind of fiscal stimulus and all of us are hoping that the situation in Iraq will resolve itself, one way or the other, by the middle of the year.'' Tannenbaum projects the economy will grow at a 2.7 percent pace this quarter. Economists had forecast the economy grew at a 0.9 percent annual pace in the final three months of last year, based on the median of 71 estimates in a Bloomberg News survey.
2002 Growth
For all of last year, the world's largest economy expanded 2.4 percent, following a 0.3 percent growth rate in 2001 that reflected the recession that began in March of that year. Many economists agree that contraction ended in either November or December of 2001. Still, sluggish growth and a weak job market has kept the Cycle Dating Committee of the National Bureau of Economic Research, the private group of economists considered the arbiter of when recessions begin and end, from calling the recession over. Consumer spending rose at a 1 percent annual pace last quarter. That was the weakest since the first quarter of 1993 and down from a 4.2 percent rate in the previous three months. The slowdown was led by a 7.3 percent decrease in spending on durable goods such as automobiles, the biggest drop in almost 12 years. Spending on services rose at a 1.3 percent pace, down from a 2.3 percent rate in the third quarter.
No Double-dip
Household spending was almost certain to slow because the quarter got off on a weak note. A 0.6 percent decrease in September personal spending hobbled growth heading into the fourth quarter. An expected 0.7 percent increase in December personal spending, led by resurgent auto sales, suggests that household expenditures entered the first quarter on firmer footing, economists say. ``We got enough momentum in terms of consumer spending that we are probably going to do OK'' this quarter, said Joseph Liro, chief economist at Stone & McCarthy Research Associates, a forecasting firm in Princeton, before the report. Last quarter's weakness ``does not necessarily mean we are dipping back into recession.'' The economy is projected to grow 2.8 percent this year, based on the consensus of over 50 economists surveyed by Blue Chip Economic Indicators this month. Procter & Gamble Co., the largest U.S. maker of household goods, this week raised their earnings outlook for the current fiscal year. The maker of Pampers diapers and Crest toothpaste said earnings would rise by 12 percent to 13 percent, higher than their previously stated goal of 10 percent growth.
Business Spending Rises
The slowdown in consumer spending led businesses to trim inventory building. Companies added inventories at a $3.3 billion annual pace in the fourth quarter after increasing stockpiles at an $18.8 billion rate in the previous three months. That subtracted 0.56 percentage points from growth. It also likely means higher growth ahead, economists said. Low inventories ``will set you up for a rebound in the first quarter'' as companies increase production to keep up with demand, said Michael Carey, an economist at Credit Lyonnais Securities Inc. in New York. Real final sales, which exclude inventories, rose 1.3 percent at an annual rate compared with a 3.4 percent increase the prior three months. Also encouraging was the first rise in business spending in two years. Business fixed investment, which includes spending on commercial construction as well as equipment and software, rose at a 1.5 percent annual rate in the fourth quarter after falling at a 0.8 percent pace in the third. It was led by a 5 percent increase in spending on equipment and software.
Fed Optimism
Business investment in plants and other structures fell at a 9.3 percent annual rate, compared with a decrease of 21.4 percent in the third quarter. It was the smallest drop in five quarters. Once concerns about the effects of a possible war with Iraq and higher oil prices are cleared up, Fed policy makers expect business spending to rise at a faster pace. ``As those risks lift, as most analysts expect, the accommodative stance of monetary policy, coupled with ongoing growth in productivity, will provide support to an improving economic climate over time,'' the central bankers said in a statement yesterday. The affects of a shutdown of West Coast ports were felt in the fourth quarter as the nation's trade gap rose, subtracting 0.68 percentage points from growth. Ports were shut in September and early October, and the reopening led to a surge of imports in November.
Housing and Government
Imports rose by $14.2 billion in the fourth quarter while exports fell by $4.7 billion. That left a net trade deficit of $506.9 billion compared with a $488 billion gap in the third quarter. Housing and government spending provided what lift there was to the economy last quarter. Government spending rose at a 4.6 percent annual pace last quarter, after rising at a 2.9 percent annual rate in the previous three months. Spending on residential construction rose 6.8 percent at an annual pace after rising 1.1 percent the previous three months. Inflation stayed in check. The GDP price deflator, a gauge of inflation tied to the report, rose at a 1.8 percent annual rate in the fourth quarter after rising at a 1 percent pace from July to September. The personal consumption expenditure deflator rose at a 1.9 percent rate, up from 1.7 percent in the third quarter. Adjusted for inflation, GDP totaled $9.503 trillion in the fourth quarter when measured at an annual rate. In the third quarter, GDP totaled $9.486 trillion. //www.quote.bloomberg.com

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