Facebook Twitter

Slump may be turning around

U.S. economy inched up a bit in 4th quarter

SHARE Slump may be turning around

WASHINGTON — The U.S. economy, propped up by a surge in consumer spending on cars and the biggest increase in government spending in 15 years, managed to grow at a 0.2 percent annual rate last quarter, the Commerce Department reported Wednesday.

The small increase in the broadest measure of the economy, the gross domestic product, could mean that economists will date the end of the recession around the end of last year or the beginning of this year.

If the fourth-quarter GDP, the total output of goods and services, remains positive in upcoming monthly revisions, it will mean that this recession had only one negative quarter when output contracted. It dropped at an annual rate of 1.3 percent in the July-September quarter.

The mildness of the recession in terms of lost output is little comfort, however, to the 1.4 million Americans who have lost jobs since the slump began in March.

Recognizing this political reality, President Bush in his first State of the Union address Tuesday night pledged to wage war on recession, challenging Congress to pass his proposed extended unemployment benefits and tax cuts to spur business investment.

However, Bush's campaign for increased stimulus was dealt a setback last week when Federal Reserve Chairman Alan Greenspan cast doubt on the need for the plan, given the growing signs that the economy was close to mounting a recovery.

Fed policymakers were meeting Wednesday, and most analysts expected they

would decide against cutting interest rates again, believing that the 11 rate cuts they engineered last year will be enough to guarantee a sustainable rebound.

However, Wall Street investors, awaiting the Fed's decision, weren't inspired by the small gain in GDP. The Dow Jones industrial average was down 32 points and the Nasdaq was off 24 in morning trading.

David Wyss, chief economist at Standard & Poor's in New York, said that based on the current GDP figures, "This will be the mildest recession in postwar history."

If Friday's unemployment report shows business payrolls stopped contracting and grew in January, he said, the National Bureau of Economic Research may well end up declaring that the recession ended in December. That would mean the downturn lasted nine months, two months shorter than the average in the post-World War II period. In November, the NBER declared that the recession had begun in March.

Based on the current GDP data, total output will have declined by 0.3 percent, the smallest drop in GDP during a recession in postwar history. By comparison, the last downturn, the 1990-91 recession, saw a 1.5 percent drop in GDP.

While the rule of thumb for recessions is two consecutive quarters of declining GDP, the NBER uses several monthly statistics to better pinpoint the economy's exact turning points and there have been other downturns that did not meet the two-negative-quarter definition.

The 0.2 percent growth rate for the fourth quarter was far better than economists had been expecting. The consensus was that the GDP fell at an annual rate of around 1 percent in the fourth quarter.

For the year, the economy grew by just 1.1 percent, a sharp deceleration from the 4.1 percent increase in 2000. It was the weakest showing since the economy actually contracted by 0.5 percent for all of 1991, the year the last recession ended.

The small gain in the fourth quarter was powered by a 5.4 percent rate of increase in consumer spending, reflecting a burst of auto sales in the final three months of the year as consumers took advantage of free financing offers. It was the biggest quarterly jump in consumer spending, which accounts for two-thirds of the economy, since the first quarter of 2000.

Also helping growth was a 9.2 percent growth rate for government spending. It was the biggest quarterly increase since the third quarter of 1986 and reflected a big rise in federal spending on the war in Afghanistan and to boost security at home.

Inflation, as measured by a gauge tied to the GDP, was benign in the final three months of the year, rising at an annual rate of just 0.8 percent. For the year, inflation as measured by this index, favored by Greenspan because it captures price increases paid by consumers, rose by 1.9 percent, a better showing than the 2.7 percent increase in 2000.

The biggest negative in the fourth quarter was a record drop of $120.6 billion at an annual rate in business inventories as firms continued a frantic effort to work off unsold goods. Inventories have been a drag on growth all year long.

However, Greenspan and many private economists have said that this huge decline in unsold goods in the past year is likely drawing to an end and will mean that inventory building in future quarters could turn into a powerful force driving the economy forward.

Business investment in new plants and equipment fell for a fourth consecutive quarter, dropping at a rate of 12.8 percent, the biggest decline since a 14.6 percent drop in the second quarter.

The trade deficit subtracted 0.85 percentage point from the overall GDP total in the fourth quarter, compared to a reduction of 0.27 percentage point in the third quarter.

Taken together, the various changes left GDP growing at an annual rate of $9.32 trillion in the fourth quarter, an increase of $5.2 billion. In the third quarter, the GDP had contracted by $31.3 billion. All the GDP figures are adjusted for inflation.