Economy sputters with 0.6% GDP growth
WASHINGTON (AP) - March 27, 2008 The Commerce Department reported Thursday that gross domestic
product increased at a feeble 0.6 percent annual rate in the
October-to-December quarter. The reading - unchanged from a
previous estimate a month ago - provided stark evidence of just how
much the economy has weakened. In the prior quarter, the economy
clocked in at a sizzling 4.9 percent growth rate.
The gross domestic product (GDP) measures the value of all goods
and services produced in the United States and is the best
barometer of the country's economic health.
Many economists say they believe growth in the current
January-to-March quarter will be even weaker than the 0.6 percent
figure of the previous quarter. A growing number also say the
economy may actually 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."
On Wall Street, stock were down in morning trading.
In another report, fewer people signed up for unemployment
benefits last week, although that didn't change the broader picture
of a deteriorating jobs market. The Labor Department said jobless
claims fell by 9,000 to 366,000, a better showing than many
economists were forecasting. Still, unemployment is expected to
rise this year given all the problems clobbering the economy.
The newly released fourth-quarter GDP figure matched analysts'
expectations.
Thursday's report underscored the damage to the economy 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.
Against that backdrop, builders slashed spending on housing
projects by a whopping 25.2 percent on an annualized basis in the
fourth quarter, the biggest cut in 26 years.
To limit the damage from the crises, the Federal Reserve has
taken a number of extraordinary actions. It has slashed a key
interest rate over the last two months by the most in a quarter
century. And to relieve turmoil on Wall Street, which intensified
after the crash of the country's fifth-largest investment firm,
Bear Stearns, the Fed has resorted to its greatest expansion of
lending authority since the 1930s. Big securities firms will
temporarily be allowed to go to the Fed directly for loans - a
privilege that had been afforded only to commercial banks.
With the nation's economic woes a top concern for voters, the
White House and Democrats in Congress have been scrambling to
provide relief. Democratic presidential candidate Barack Obama on
Thursday called for an overhaul of financial regulations.
Consumers, whose spending is indispensable to the economy's
vitality, boosted buying at a 2.3 percent pace in the fourth
quarter. That was better than the 1.9 percent growth rate
previously estimated but still marked a slowing from the third
quarter's 2.8 percent pace.
Businesses - nervous about customers' waning appetite to buy
given all the problems in the economy - 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.
That was slightly less than previously estimated and marked a
slowdown from the prior quarter's 6.2 percent growth rate.
Businesses' profits also took a hit in the final quarter. A
measure linked to the GDP report showed that after-tax profits fell
3.3 percent at the end of last year, after being flat in the prior
quarter.
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. That was better than the 4.8 percent growth rate
previously estimated, although it was down sharply from the prior
quarter's blistering 19.1 percent growth rate.
U.S. exports have been helped by the sinking value of the U.S.
dollar, which makes U.S. goods less expensive to foreign buyers.
The U.S. dollar recently plunged to record lows against the euro
and has fallen sharply against the Japanese yen.
The drooping dollar can aggravate inflation pressures.
An inflation measure linked to the GDP report showed that
overall prices increased at a rate of 3.9 percent in the fourth
quarter. That was not as high as previously estimated but marked a
big pickup from the third quarter's 1.8 percent pace.
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 are topping $105 a barrel. Gasoline prices have
marched higher, too. High energy prices can spread inflation if
lots of companies boost prices charged to customers for a wide
range of goods and services. High energy prices also can be a drag
on overall economic growth by crimping consumer spending.
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 stimulus package of tax rebates for people and tax breaks
for businesses should help revive economic growth in the second
half of this year, economists said.