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Economy Is Expanding, but Obama’s Legacy May Be Slipping Away

Five years into the Obama presidency, the American economy is finally showing some momentum.

The Commerce Department reported on Thursday that the economy grew by 3.2 percent in the final quarter of 2013, echoing the even stronger 4.1 percent pace of expansion in the summer months and providing the White House with a rare bit of good news despite dismal public approval ratings.

But even if 2014 turns out to be what the president called a "breakout year" in his State of the Union address Tuesday, the country will still have a lot of catching up to do before the gains recorded under Mr. Obama match those of his two predecessors in the White House.

(Read more: Obama renews long-standing, unmet economic proposals)

Much of the shortfall through the first year of President Obama's second term dates back to the deep hole he inherited from George W. Bush as the economy plunged into the Great Recession at the end of 2007.

Saul Loeb | AFP | Getty Images

Still, despite giving President Obama credit for helping steer the country out of the recession, economists say he still faces an uphill battle to burnish his economic legacy before he leaves office in early 2017.

"Even if you have another two or three years of pretty good growth, how much are the averages really going to move up?" asked Guy Berger, United States economist at RBS. "Compared to the Clinton years, and frankly, most of the Bush years, it will be tough to match."

For example, after including the latest figures for growth on Thursday, the economy has expanded at annual rate of 1.8 percent under President Obama, half the pace of growth in the first five years of the Clinton administration,and below the 2.5 percent annual growth rate for President Bush between December 2000 and December 2005 in the same years.

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The rise in disposable per capita income has also been weaker, inching up just 0.6 percent annually in the last five years, compared with almost 2 percent from 1993 to 2008.

Unemployment has come down sharply recently, but at 6.7 percent, it is still roughly two percentage points higher than at this time in the Clinton and Bush presidencies.

"The economy is behaving differently now than it did in those two periods under Clinton and Bush," Mr. Berger said. "Without a meaningful increase in employment, it makes it difficult to power strong growth in the future."

Mr. Berger's outlook is more pessimistic than that of some of his peers on Wall Street; many other economists now believe 2014 — if not necessarily a breakout year — is still very likely to be the strongest since Mr. Obama took office in January 2009.

(Read more: Obama gets pledges from big business on unemployed)

"The U.S. economy is at an inflection point," said Ellen B. Zentner, senior United States economist at Morgan Stanley. "The recovery is just now beginning to look like what a normal recovery looks like. We've been in no man's land."

"If I were going to keep scorecards, I'd start now," Ms. Zentner added.

The encouraging report on growth, along with measured optimism about 2014, helped lift Wall Street on Thursday, despite continuing worries about weakness in emerging markets and the slow but steady withdrawal of some of the Federal Reserve's giant monetary stimulus.

The Standard & Poor's 500-stock index rose 19.99 points, or 1.1 percent, to close at 1,794.19. The Dow Jones industrial average gained 109.82 points, or 0.7 percent, to 15,848.61. The Nasdaq composite index climbed 71.69 points, or 1.8 percent, to 4,123.13.

In the bond market, interest rates were little changed. The yield on the Treasury's 10-year note edged up to 2.69 percent, from 2.68 percent late Wednesday, while its price slipped 5/32, to 100 15/32.

The stock market has been one major winner under President Obama, with the S.&P. 500 having more than doubled since it bottomed out in early 2009, shortly after he took office.

But while Wall Street was rebounding, President Obama has faced major headwinds in a series of fiscal crises in Washington, not just the debt ceiling battle last year but also a face-off over the same issue in the summer of 2011 that unnerved Wall Street and prompted a downgrade in the country's credit rating. The fiscal cliff showdown over expiring tax cuts in late 2012 did not help matters, either.

While Democrats and Republicans each blame the other side for those fights, the chief economist at the consulting firm IHS, Nariman Behravesh, said that President Obama should have done more earlier in his first term to forge a broader fiscal blueprint. "He could have tried harder to work out a compromise, and some uncertainty would have been off the table," Mr. Behravesh said.

Now, after years of this kind of wrangling, Mr. Behravesh said there were signs that companies and consumers were simply paying less attention to the dysfunction in Washington.

"A lot of people are feeling jaded," Mr. Behravesh noted. Even during the government shutdown in October, he said, "there wasn't a huge impact beyond the beltway and business pretty much ignored it."

That came as a surprise to many economists, not to mention Washington's pundits, as did the broader turnaround in the third and fourth quarters of 2013. It was the strongest second-half performance in a decade — and far better than experts were predicting not long ago.

The single biggest positive factor in the fourth-quarter expansion of gross domestic product was a healthy rise in consumer spending, despite the mixed results of some retailers during the holiday season. Personal consumption expenditures rose by 3.3 percent, up from 2 percent in the previous quarter, with strong demand for durable goods like washing machines and televisions as well as nondurables like food and clothing.

In the service sector, spending on dining and hotels jumped after barely increasing in the previous two quarters. Exports also surged while imports increased only slightly, making trade the second biggest contributor to growth after consumer spending.

As was the case in the third quarter, inventory additions by businesses also lifted growth, adding 0.4 of a percentage point. Some of those stockpiles will most likely be drawn down in the first quarter of 2014, slowing the expansion a bit in the current quarter, economists said.

Over all, government expenditures plunged 12.6 percent in the fourth quarter because of the partial federal shutdown and a broader fiscal squeeze, lowering total growth by nearly a full percentage point. The Bureau of Economic Analysis, the Commerce Department unit that tracks G.D.P., said the full effect of the government closure "cannot be quantified," but estimated that the hours lost as government employees stayed home shaved off 0.3 of a percentage point.

Housing was also a source of weakness, cutting overall growth by 0.3 percentage point. Some of that drop was weather-related, as construction activity halted, but it also represented a slowing of housing gains as mortgage interest rates rose and the sector's postrecession rebound cooled.

(Read more: Obama's 'MyRA' retirement plans may have limited advantages)

"It's a pretty solid report with a big burst in consumption at the end of the year, a big narrowing in the trade deficit and some weakness in housing," said Julia Coronado, chief economist for North America at BNP Paribas.

The fourth-quarter number was the Commerce Department's first estimate of the economy's performance in the period. Government statisticians will revise the growth number two more times in late February and late March as more data comes in.

Also on Thursday, the Labor Department said weekly applications for unemployment benefits rose 19,000 last week to 348,000, the highest in about a month. But the broader trend in applications remains low. The four-week average, a less volatile measure, increased just 750 to 333,000. The increase follows three weeks of declines.

And the National Association of Realtors said Thursday that pending home sales fell to their lowest point in December since October 2011, but economists were wary of declaring a fundamental shift because unusually cold weather played an uncertain role in the pullback.

By Nelson D. Schwartz of The New York Times

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