Economy faltered at end of 2007, probably more feeble now

WASHINGTON -- The economy nearly sputtered out at the end of the year and probably is faring even worse now amid continuing housing, credit and financial woes.

The Commerce Department reported Thursday that the gross domestic product, or GDP, increased at a feeble 0.6 percent annual rate from October through December.

The reading, unchanged from a previous estimate a month ago, provided stark evidence of just how much the economy has weakened. In the previous three months, the economy had a sizzling 4.9 percent growth rate.

The GDP measures the value of all goods and services produced in the United States and is the best barometer of economic health.

Many economists say they believe growth in the current January-through-March quarter will be even weaker than the 0.6 percent figure from late 2007. A growing number says the economy actually may be shrinking now.

Under one rough rule, the economy needs to contract for six straight months to be considered in a recession. The government will release its estimate for first-quarter GDP in late April.

"The economy just kept its head above water" in the fourth quarter, said Nigel Gault, chief U.S. economist at Global Insight. "We think that GDP will decline, albeit slightly, during the first half of 2008," he said. "The first half outlook is bleak."

Commerce Secretary Carlos Gutierrez, in an interview with The Associated Press, said, "We know the first quarter will be difficult."

On Wall Street, the GDP report pulled stocks down, with the Dow Jones industrials falling 120.40 points.

In a second report, fewer people signed up for unemployment benefits last week, although that did not change the broader picture of a deteriorating job market. The Labor Department said jobless claims fell by 9,000 to 366,000, a better showing than many economists forecast. Still, unemployment is expected to rise this year given all the problems affecting the economy.

The newly released fourth-quarter GDP figure matched analysts' expectations.

Thursday's report was evidence of the fallout from the collapse in the housing market, which has dragged down housing prices, pushed home foreclosures up to record highs and has led to a glut of unsold homes.

Builders slashed spending on housing projects by 25.2 percent on an annualized basis in the fourth quarter, the biggest cut in 26 years.

To limit the damage, the Federal Reserve has cut a key interest rate over the past two months by the deepest in a quarter-century. After the crash of the fifth-largest investment firm, Bear Stearns, the Fed resorted to its greatest expansion of lending authority since the 1930s. Big securities firms temporarily can go to the Fed directly for loans -- a privilege that had been afforded only to commercial banks.

Democratic presidential candidate Barack Obama on Thursday called for an overhaul of financial regulations. Rival Hillary Rodham Clinton proposed a new job retraining program to bolster the economy.

Consumers boosted buying at a 2.3 percent pace in the fourth quarter. But businesses cut back sharply on their inventories of unsold goods. That shaved 1.79 percentage points off fourth-quarter GDP, the most in more than two years.

Spending by businesses on equipment and software, meanwhile, rose at a pace of 3.1 percent in the final quarter of last year.

There was a bright spot in the mostly gloomy report, however. Sales of U.S. goods and services to other countries grew at a 6.5 percent pace. U.S. exports have been helped by the sinking value of the dollar, which makes U.S. goods less expensive to foreign buyers. The dollar recently plunged to record lows against the euro and has fallen sharply against the Japanese yen.

An inflation measure linked to the GDP report showed that overall prices increased at a rate of 3.9 percent in the fourth quarter.

Another gauge showed that core prices -- excluding food and energy -- grew at a rate of 2.5 percent at the end of last year. That was down from a previous estimate of a 2.7 percent pace but was up from the prior quarter's 2 percent growth rate.

The new core inflation figure is above the Fed's comfort zone -- the upper bound of which is a 2 percent inflation rate.

Although the Fed's No. 1 job is trying to save the economy from a deep and prolonged recession, it is also keeping close tabs on inflation and soaring energy prices.

Oil prices shot past $107 a barrel on Thursday. Gasoline prices have marched higher, too.

The combination of slowing economic growth and rising inflation make the Fed's job more difficult. It also has raised fears the country may be headed for a bout of stagflation, a scenario the U.S. hasn't experienced since the 1970s. Fed Chairman Ben Bernanke, however, has said that's not the case.

The Fed's rate reductions along with the government's $168 billion economic aid plan should help revive economic growth in the second half of this year, economists said.

Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, was less optimistic. "The recovery in growth I had expected in the second half of this year may be delayed," he said.