Washington, March 27 (Bloomberg) -- The U.S. economy grew from October through December at about a third of the prior quarter's pace, hobbled by slower consumer spending which has shown few signs of rebounding because of the Iraq war. Gross domestic product, the sum of all goods and services produced in the U.S., expanded at a 1.4 percent annual rate, matching the Commerce Department's estimate last month. The economy grew at a 4 percent pace in the third quarter. Consumer spending was the weakest since the third quarter of 2001 when terrorists attacked New York and Washington. War anxiety and the highest energy costs in 12 years have pushed consumer confidence to the lowest in a decade, slowing spending, which accounts for two-thirds of the economy. Economists have lowered their estimates for first-quarter growth as companies remain reluctant to invest in new equipment or hire. The Iraq war ``has led both consumers and businesses to a higher level of conservatism, and that will not help the hiring outlook,'' said Carl Tannenbaum, chief economist at ABN Amro Inc.'s LaSalle Bank, in Chicago. The Labor Department reported jobless claims held above 400,000 for a sixth straight week. States received 402,000 applications for unemployment insurance last week after 427,000 the prior week. Economists had forecast the government wouldn't revise last month's preliminary estimate of fourth-quarter growth, based on the median of 61 forecasts in a Bloomberg News survey. Adjusted for inflation, GDP totaled $9.518 trillion at an annual rate. For all of last year, the economy grew 2.4 percent.
Trade Deficit, Spending
Fourth-quarter growth was restrained by a wider U.S. trade deficit and a slowdown in consumer spending. Personal spending on goods and services rose at a 1.7 percent annual rate. While that added 1.19 percentage points to growth in the quarter, it was less than the 2.93 percentage points added from July through September. Spending on automobiles and other durable goods fell at an 8.2 percent annual rate last quarter, the biggest decrease since the first three months of 1991, when the economy was in recession. Industry figures show auto sales dropped in January and February. Spending on all goods and services fell 0.1 percent in the first month of the year, other government statistics show. Total spending probably dropped again last month, according to the median estimate of economists surveyed by Bloomberg News ahead of tomorrow's report from Commerce. That would be the first back-to-back decline since December 1990-January 1991, when the economy was in the midst of recession.
Corporate Profits
A $44.2 billion widening at an annual rate in the trade deficit was the biggest drag on the economy from October to December, subtracting 1.59 percentage points from GDP. Growth hasn't been strong enough to help corporate profits. Earnings before taxes and adjusted for the value of inventories and capital consumption, a gauge favored by many economists because it shows profits from current production, rose 3.1 percent last quarter, the first rise in a year, the government reported for the first time today. Still, compared with the same three months in 2001, those profits fell 10.5 percent. ``Without a turnaround in earnings, we won't get a turnaround in capital spending in any meaningful way,'' said Douglas Porter, a senior economist at BMO Nesbitt Burns Inc. in Toronto, before the report. Better profits lead increases in business investment by a quarter or two and ``are a necessary condition for the economy'' to accelerate, he said. Economists are reining in growth forecasts for the first half of this year as the buildup to war with Iraq caused oil prices to reach a 12-year high of $39.99 a barrel on Feb. 27. Consumer confidence for this month fell to 62.5, the lowest since October 1993, according to a report this week from the Conference Board, a New York-based research group.
Lower Forecasts
The world's biggest economy probably grew at a 2 percent annual rate from January through March, according to the median estimate in a Bloomberg survey of 71 economists last week, down from a December forecast of 2.5 percent. The economy grew at an average of 3.6 percent a year from 1992 to 2000, the period between the last two recessions. The economy is expected to grow at a 2.2 percent pace in the quarter that starts Monday, according to the survey median. Federal Reserve policy makers last week refrained from characterizing the risks facing the economy because the war with Iraq made it difficult to assess the outlook. Central bankers decided to leave the target for the overnight bank lending rate at 1.25 percent, a 41-year low. Economists are divided on whether a quick resolution to the war will help the economy accelerate. Corporate governance and accounting issues, excess capacity and low profitability may burden the economy after the war.
Business Spending
``The boardroom and the executive suite may well remain besieged long after the `Siege of Baghdad' is concluded,'' said Neal Soss, chief economist at Credit Suisse First Boston Inc. in New York, before the report. At the end of last year, before the buildup to war, there were signs business investment was starting to pick up. Businesses added inventories at a $25.8 billion annual pace in the fourth quarter after increasing stockpiles at an $18.8 billion rate in the previous three months. More inventories contributed 0.28 percentage point to growth. Business fixed investment, which includes spending on commercial construction as well as equipment and software, rose at a 2.3 percent annual rate in the fourth quarter, the first increase in two years, after falling at a 0.8 percent pace in the third. The gain was led by a 6.2 percent increase in spending on equipment and software. Government spending rose at a 4.6 percent annual rate last quarter, up from 2.9 percent in the previous three months, and is expected to be a source of strength for the economy in 2003. 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 1.0 percent pace from July through September. //www.quote.bloomberg.com