Fourth quarter sees GDP up by 4 percent

Saturday, January 31, 2004

WASHINGTON -- America's economy cooled from its red-hot pace in the final three months of 2003 but still advanced at a 4 percent annual rate -- strong evidence the recovery was still on solid ground.

The reading on the gross domestic product for the October-to-December quarter, reported Friday by the Commerce Department, came after the economy grew at a 8.2 percent rate in the third quarter. That had been the strongest performance in nearly two decades.

GDP measures the value of all goods and services produced within the United States and is the broadest measure of the economy's health.

"The economy showed a solid performance in the fourth quarter, suggesting the economy is building momentum and is well-positioned for further growth despite the slowdown from the third-quarter's surge," said Lynn Reaser, chief economist at Banc of America Capital Management.

The economy fell into recession in 2001, struggled mightily to get back on its feet and finally, in the last six months of 2003, staged a rebound. The 6.1 percent average growth rate seen in the second half of last year represented the fastest back-to-back quarterly increases since the first two quarters of 1984.

Analysts were predicting a slowdown in economic growth in the fourth quarter as the stimulative impact of tax cuts and a refinance frenzy -- which propelled the economy during the summer -- faded with the onset of winter.

The 4 percent growth rate for the GDP, however, was weaker than the 4.8 percent pace forecast by analysts. That disappointed Wall Street. The Dow Jones industrials lost 22.22 points to close at 10,488.07.

For all of 2003, the economy grew by 3.1 percent -- the best showing since 2000 and an improvement over the 2.2 percent increase in 2002.

For out-of-work Americans, though, it may not feel like better economic times.

Job growth has been slow. The nation's payrolls grew by a scant 1,000 jobs in December, disappointing economists and frustrating jobseekers.

The economy has lost 2.3 million jobs since President Bush took office in January 2001. While the president believes a stronger economy will lead to more jobs, Democrats point to the job losses as evidence of what they say are the president's failed economic policies. Bush's tax cuts, they say, haven't led to meaningful job creation and have dug the nation's budget hole deeper.

"There's little to celebrate when growth doesn't benefit workers," said Rep. Pete Stark, D-Calif. "People are saying, 'Show me the jobs."'

Bush, meanwhile, renewed a call to Congress to make his tax cuts permanent, saying it would help the recovery. "The American people can know that we'll continue to work hard to make sure this economy is vibrant and robust and strong so our fellow citizens can find good jobs," he said.

Analysts are hopeful stronger job growth will take place later this year as businesses feel more confident in the recovery and see their bottom lines improve.

In the fourth quarter, businesses increased investment in equipment and software at a brisk 10 percent rate, turning in the second consecutive quarter of double-digit growth in this key sector.

In another encouraging sign, businesses replenished inventories in the fourth quarter. That added 0.61 of a percentage point to the GDP last quarter, a turnaround from the 0.13 percentage-point reduction to the GDP in the third quarter.

"I think we are actually getting a broader, more balanced economic recovery despite the fourth-quarter slowdown," said Sung Won Sohn, Wells Fargo's chief economist. "We added a second engine to economic growth -- business spending -- and we throttled back the first engine, consumer spending."

Consumers, who had been on a buying binge, took a break and let their credit cards cool in the fourth quarter, helping to subdue economic growth. Their spending went up at a 2.6 percent rate, down from a 6.9 percent growth rate in the third quarter, the fastest clip since 1986.

Consumers showed less of an appetite to spend for big-ticket items, such as cars, in the fourth quarter after spending lavishly on such durable goods in the previous quarter.

Economists are optimistic consumer spending -- helped by tax refunds -- is picking up in the current quarter and will help the GDP expand at a rate of more than 4 percent. That said, economists haven't let go a concern that anxiety over the still fragile job market could turn consumers cautious.

"Even though I'm generally confident that the recovery remains on track, it's hard not to be somewhat concerned, especially given the continued weakness in the labor market," said Bill Cheney, chief economist at John Hancock.

One price gauge tied to the GDP and closely watched by Federal Reserve Chairman Alan Greenspan grew at a 0.6 percent rate in the fourth quarter, a big slowdown from its 1.8 percent growth rate in the third quarter.

With inflation under control, some economists said the Fed has leeway to hold a key short-term interest rate at a 45-year low of 1 percent for most, if not all, of this year. But other economists believe the Fed will start to nudge up rates this summer.


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