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Economy grows slightly

Consumer caution gets the blame for dismal 4th quarter

SHARE Economy grows slightly

WASHINGTON — The U.S. economy slowed dramatically in the final quarter of last year, growing at an annual rate of just 0.7 percent as consumers turned cautious in the face of war worries, a roller-coaster stock market and a stagnant job climate and increased their spending by the smallest amount since 1993.

The meager rise in gross domestic product in the fourth quarter of 2002 came after the economy grew at a respectable 4 percent rate in the third quarter, the Commerce Department reported Thursday.

GDP measures the total value of goods and services produced within the United States and is considered the broadest barometer of the economy's health.

"The roller-coaster ride continues as the economy just cannot sustain solid growth," said economist Joel Naroff, president of Naroff Economic Advisors. "Growth is up, growth is down, the economy's growth is all over the town."

The performance — weaker than the 0.9 percent increase analysts were predicting — gave the fourth quarter the distinction of being the worst quarter for GDP in 2002. It also marked the weakest showing since the economy actually shrank at a 0.3 percent rate in the third quarter of 2001 as the country was mired in its first recession in a decade.

On Wall Street, stocks sagged. The Dow Jones industrial average was off 38 points and the Nasdaq was down 6 in Thursday morning trading.

Although the economy ended 2002 on a sour note, for all of 2002 the economy grew by a decent 2.4 percent. While that marked a big improvement over the tiny 0.3 percent rise registered in 2001, it was still considered weaker-than-normal growth for the U.S. economy.

The economy, knocked down by a recession that began in March 2001, has been struggling to get back on sure footing. Economic growth has been uneven, with a quarter of strength, followed by a quarter of weakness. That has presented challenges for President Bush, who wants to get the economy back to full throttle and doesn't want economic woes to linger as he gets ready for his 2004 re-election bid.

To help jolt economic growth, Bush has offered a 10-year, $674 billion tax-cut proposal. Democrats have their own, smaller-scale plans.

Commerce Secretary Don Evans said the GDP report underscores the need for Congress to enact the president's plan and shows "that our nation's economy is not yet growing at its fullest potential."

Consumers have been virtually the sole source of support keeping the economy going.

But in the fourth quarter of 2002, they grew tired. Consumer spending, which accounts for two-thirds of all economic activity in the United States, grew at a rate of just 1 percent in the final quarter of last year. That was down from a brisk 4.2 percent growth rate in the third quarter and marked the worst showing since the first quarter of 1993.

All of the weakness in consumer spending in the fourth quarter reflected a sharp cut in spending on "durable" goods, big-ticket manufactured products such as cars and appliances. Consumers reduced such spending at a 7.3 percent rate. That was a big turnaround from the astounding 22.8 percent rate of increase in the third quarter and marked the largest cutback in spending on durable goods since the first quarter of 1991.

Economists were predicting consumers would lose some of their appetite for spending in the face of worries about a possible war with Iraq, a lackluster job market and a turbulent stock market.

In other economic reports from the Labor Department, workers' wages and benefits grew by 0.7 percent in the last three months of 2002 following a 0.8 percent gain in the previous quarter. And new claims for unemployment benefits last week rose by a seasonally adjusted 14,000 to 397,000.

Still, most economists believe consumers will keep their pocketbooks and wallets sufficiently open to prevent the economy from backsliding into a new recession.

For the economy to get back on sure footing, a sustained turnaround in business investment is necessary, economists say.

Businesses, worried about a war and other uncertainties, have been in no mood to go on hiring sprees or buying binges when it comes to capital investments in plant and equipment.

But there was some encouraging news in the fourth quarter on this front. After eight straight quarters of cutting capital spending, businesses boosted such investment at a 1.5 percent rate in the fourth quarter. That was an improvement over the 0.8 percent rate of decline in the third quarter and marked the best showing since the third quarter of 2000.

All of the strength, however, came from spending on equipment and software. Companies continued to cut investment in new plants and buildings.

Businesses, however, added less to their stockpiles of unsold goods in the fourth quarter, resulting in a 0.6 percentage-point reduction to GDP. The bloated trade deficit also was a drag on fourth-quarter economic growth.

An inflation gauge tied to the GDP rose at a 1.9 percent rate in the fourth quarter, up a bit from the 1.7 percent rate in the third quarter as oil prices rose amid war worries. Still the latest reading suggests inflation is under control.