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Fourth-Quarter GDP Surged 3.5%, Stronger Than Expected

CNBC.com
Wednesday, 31 Jan 2007 | 10:11 AM ET

The U.S. economy surged ahead at a greater-than-expected 3.5% annual growth rate in the fourth quarter, as lower energy prices freed up consumer spending, the Commerce Department said.

The preliminary estimate of the economy's growth came amid a rush of data that showed a mixed picture of the U.S. economy.

Construction spending unexpectedly fell 0.4% in December, the Commerce Department said, led by a ninth straight drop in residential building. Also, business activity in the Midwest contracted in January, confounding expectations for a continued expansion.

Still, a survey by ADP Employer Services showed that private employers likely added 152,000 new jobs in January. And separate reports showed a moderation of employment costs and an increase in applications for home mortgages as both home purchases and refinancing picked up.

The first read on gross domestic product or GDP, the broadest measure of overall economic activity within U.S. borders, during the October-through-December quarter was stronger than economists were expecting. On average, economists had predicted an increase of 3.0%.

The strong reading on the final quarter of last year is the last piece of key data Federal Reserve policymakers will weigh at their meeting on Wednesday. Economists are expecting the central bank will keep interest rates unchanged at 5.25%.

A decision is expected to be released at 2:15 pm new York time. Investors will likely comb through the Fed's statement accompanying the decision for clues on the central bank's thinking on inflation, economic growth and the future course of interest rates.

PCE Index Up 2.1%

On the inflation front, the closely watched personal consumption expenditures price index fell 0.8% during the quarter, the biggest decline since the third quarter of 1954 when it dropped 1.2%. The quarterly decline reflected a huge drop in energy prices, a department official said, and was substantially lower than the 1.9% advance Wall Street economists were expecting.

Excluding volatile food and energy prices, the so-called core PCE index was up 2.1%, still slightly above the Fed's assumed comfort range of 1% to 2%. Economists were expecting the core PCE index to advance 2.2%.

For the whole year, GDP advanced by 3.4% after a 3.2% gain in 2005 and 3.9% growth in 2004.

Spending on new home building declined at a 19.2% rate during the quarter, as the housing market continued to weaken. That was the biggest decline since a 21.7% decrease in the first three months of 1991. For the year, residential spending was down 4.2%, also the biggest decrease since 1991.

During the fourth quarter, personal spending advanced by a healthy 4.4% rate, the best showing since the first quarter of last year.

Employment Costs Rise 0.8%

Separately, the Labor Department said U.S. employment costs rose a less-than-expected 0.8% in the fourth quarter, the smallest increase since the first quarter of 2006, as wages and salaries advanced less than in the prior quarter.

The increase in the Employment Cost Index, a broad gauge of what employers pay in wages and benefits, eased from the third quarter's 1% gain and was below the 1% rise economists estimated. It was the smallest increase since a 0.6% rise in the January to March period of 2006.

Wages and salaries advanced 0.8% during the fourth quarter after logging a 0.9% gain the prior quarter. Benefit costs advanced 1.1% in the fourth quarter, the same magnitude as in the third quarter.

In the 12 months ended in December, employment costs were up 3.2%, with wages and salaries up 3.2% and benefit costs up 3.6%.

Meanwhile, the number of new jobs measured by payrolls giant Automatic Data Processing and consultancy Macroeconomic Advisers reversed a surprise contraction in employment shown by the series in the previous month.

The ADP National Employment Report is released each month, two days prior to the government's own job survey.

According to the latest Reuters poll of economists, the U.S. Labor Department's closely watched employment report on Friday is expected to show that 149,000 non-farm payroll jobs
were created in January, up from 167,000 in December.

Mortgage Applications Rose 3.2%

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity rose 3.2% to 631.1 in the week ended Jan. 26 after dropping 8.4% the previous week. The index is 0.7% higher than a year earlier.

The MBA's seasonally adjusted purchase index advanced 1.3% to 408.0, which was 6.4% below its year-ago level. The purchase index is considered a timely reading on U.S. home sales.

The group's seasonally adjusted refinancing application index grew 4.9% to 1,940.2, sending it 11% higher than a year earlier.

Four-week moving averages of these three readings, which smooth volatile weekly readings, were up 2.2% for the market index, 0.1% for the purchase index and 4.0% for the refinance index, according to the MBA.

Finally, the National Association of Purchasing Management-Chicago said its business barometer fell to 48.8 in January from 51.6 in December. Economists had forecast an increase to 52. A reading below 50 indicates contraction.

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