2004's economy was best in five years, GDP shows

WASHINGTON -- The economy finished 2004 with its best performance in five years despite slowing in the final stretch. The outlook ahead: a moderate jog, rather than a sprint.

The broadest barometer of the country's economic standing, the gross domestic product, clocked a 4.4 percent increase for all of last year spurred by brisk consumer and business spending, the Commerce Department reported Friday.

The latest snapshot of GDP, which measures the value of all goods and services produced within the United States, exceeded the 3 percent registered in 2003 and marked the strongest showing since the 4.5 percent gain of 1999.

"When you add it all up, you can't help but be pleased with how the economy performed last year," said Carl Tannenbaum, chief economist at LaSalle Bank.

To be sure, it wasn't all smooth sailing. In the October-to-December quarter, the economy grew at a 3.1 percent annual rate, its most sluggish pace since the first quarter of 2003.

In the third quarter, the economy expanded at a 4 percent rate.

On Wall Street, the fourth quarter's showing disappointed investors. The Dow Jones industrials lost 40.20 points to close at 10,427.20.

Although economists had expected a 3.5 percent growth rate in the fourth quarter, they said its 3.1 percent performance was still respectable and not as weak as the number suggested.

The deceleration seen in the fourth quarter from the previous quarter mostly reflected a drag on growth from the nation's swollen trade deficit. That shaved a sizable 1.73 percentage points off of fourth-quarter GDP.

Consumers and businesses, however, showed a relatively hearty appetite to spend during the final quarter even as energy prices soared. "Households and businesses went hog wild at the end of the year," said Joel Naroff, president of Naroff Economic Advisors.

Economists have varying opinions about the strength of economic growth in the current January-to-March quarter. Some predict growth could hover around a 3 percent pace. Others say it could come in closer to 4 percent. For all of 2005, analysts believe GDP will increase in the range of 3.5 to 3.8 percent -- which would be slower than 2004 but still solid, they said.

Against this backdrop, the Federal Reserve will probably stick with its gradual approach to raising interest rates, economists said.

Fed policy-makers are expected to boost rates next week by one-quarter percentage point to 2.50 percent. That would mark the sixth increase since the Fed embarked on a rate-raising campaign in June 2004.

The newest GDP readings come as President Bush tries to build political and public support for two key pieces of his second-term economic agenda: overhauling Social Security and the nation's tax code. Those are costly propositions made even more daunting, analysts say, by the government's already bloated budget deficits.

Treasury Secretary John Snow said the latest GDP figures highlight the "strength of our nation's economy" and the president's policies will "keep our economy on this upward path."

While the economy has been moving forward, the recovery in the nation's jobs market since the 2001 recession has been more uneven as companies remain somewhat cautious. Still, payrolls in 2004 expanded by 2.2 million, the first annual increase in three years.

In other economic news, the Labor Department reported that workers' wages and benefits grew 0.7 percent in the fourth quarter, down from a 0.9 percent increase in the prior quarter, as employers kept a close eye on costs.

An inflation gauge tied to the GDP report, meanwhile, showed prices rose 2.2 percent in 2004 as energy costs surged. In 2003, prices were up 1.9 percent. Excluding energy and food costs, "core" prices -- closely watched by the Fed -- increased 1.5 percent in 2004. While that was up from 1.3 percent in 2003, the pickup in core prices isn't worrisome, said Lynn Reaser, chief economist at Banc of America Capital Management.

Those higher prices didn't crimp consumer spending, the lifeblood of the economy. Consumers boosted spending in the fourth quarter at a brisk 4.6 percent annual rate. For all of 2004, spending rose 3.8 percent, the strongest since 2000.

Business spending on equipment and software, meanwhile, rose at a 14.9 percent pace in the fourth quarter. This spending was up 13.4 percent for all of last year, the most since 1997.

"The economy isn't in a galloping mode but more like a brisk trot," said Richard Yamarone, economist at Argus Research.

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Commerce Department Bureau of Economic Analysis: http://www.bea.doc.gov/