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Economy Still Shows Little Growth, Housing Worsens

AP
Thursday, 28 Feb 2008 | 10:11 AM ET

The economy skidded to a near halt in the final quarter of last year, clobbered by dual slumps in housing and credit that caused people and businesses to spend and invest more sparingly.

AP

The Commerce Department reported Thursday that the gross domestic product increased at a scant 0.6 percent pace in the October-to-December quarter. The reading -- unchanged from an initial estimate a month ago -- underscored just how much momentum the economy has lost. In the prior quarter, the economy clocked in at a brisk 4.9 percent pace.

Gross domestic product measures the value of all goods and services produced in the United States and is the best barometer of the country's economic health.

Economists had thought the newly released fourth-quarter GDP would have been bumped up to a 0.8 percent growth rate.

The housing picture looked even more bleak in the new report.

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.

And, even though economic growth slowed, inflation picked up -- an ominous mix that could spell further trouble for the economy.

Jobless Claims on the Rise

As if the newly confirmed fourth-quarter GDP figure of 0.6 percent wasn't chilling enough, the Labor Department reported Thursday that new applications for unemployment insurance benefits rose by 19,000 to 373,000 last week, more evidence that the general economic sluggishness is spilling over into the job market.

Fears have grown that the country is heading for a recession or is already in one.

The National Association for Business Economics expects economic growth in the current January-to-March quarter to slow to a meager 0.4 percent pace. Some analysts believe the economy's performance could be even worse and actually shrink during this period. Under one rough rule, the economy would have to contract for six months in a row for the country to be viewed as in a recession.

With risks lurking that the problems could intensify and further hurt the economy, Federal Reserve Chairman Ben Bernanke made clear he stands ready to lower a key interest rate again. The Fed, which started cutting interest rates to bolster the economy in September, has turned much more aggressively recently. In eight days in January, the Fed slashed rates by 1.25 percentage points -- the biggest one-month reduction in a quarter-century. Rates are expected to move lower at the Fed's next meeting on March 18.

Bernanke, however, is hopeful that previous rate reductions and the $168 billion economic aid plan of tax rebates for people and tax breaks for business will energize the economy in the second half of 2008.

A gauge of inflation linked to the GDP report showed that "core" prices -- excluding food and energy -- grew at a rate of 2.7 percent in the fourth quarter. The inflation reading -- although unchanged from the government's initial estimate -- showed that inflation had picked up sharply from the third quarter's 2 percent pace.

The inflation figure is above the Fed's comfort zone -- the upper bound of which is a 2 percent inflation rate.

With inflation rising as the economy slows, fears are increasing that the country may be headed for a bout of stagflation. That's a scenario the country hasn't experienced since the 1970s.

Even though Bernanke has made clear the Fed's top priority -- for now -- is trying to get the economy back on track, he also says he remains mindful of inflation risks, especially from high energy prices.

Oil prices have reach new record highs, galloping past $100 a barrel in recent days. High energy prices can spread inflation by boosting the costs of a wide variety of other goods and services and can put a further damper on overall economic growth by crimping consumer spending.

Consumers boosted their spending at just a 1.9 percent pace in the fourth quarter. That was down slightly from the government's previous estimate and marked a pullback from the third quarter's 2.8 percent growth rate. Consumer spending accounts for a big share of overall economic activity and thus is a major factor in how the economy fares.

Business spending on equipment and software grew at a 3.3 percent pace in the final quarter of last year. That was lower than the government's initial estimate and marked a deceleration from the third quarter's 6.2 percent growth rate.

There was a bright spot in the report, however. Sales of U.S. goods and services to other countries grew at a 4.8 percent pace in the fourth quarter, better than previously estimated. U.S. exports have been helped by the declining value of the U.S. dollar, which makes U.S. goods less expensive on foreign markets.

For all of 2007, the economy grew by 2.2 percent, the weakest showing in five years. That estimate also was not changed from an earlier reading.

The Labor Department reported Thursday that new applications for unemployment benefits rose by 19,000 to 373,000 last week. The increase was larger than many economists were expecting. They were forecasting claims to rise to around 350,000 last week.

Fallout from a housing bust and credit crunch is sapping the economy's strength. The economy barely grew -- at 0.6 percent -- in the final quarter of last year and is expected to be even weaker in the current January-to-March period. With the economy slowing, companies have been reluctant to hire and want to keep their existing work forces lean.

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