Your Economy (No Politics)

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U.S. Economy Grew at 1.1% Annual Rate in 4th Quarter
Joe Richter in Washington


Jan. 27 (Bloomberg) -- The U.S. economy limped into 2006, growing at slower-than-expected 1.1 percent pace in the fourth quarter as consumers spent at the slowest pace since 2001 and corporations limited equipment purchases.

The rise in gross domestic product, the value of all goods and services produced in the U.S., followed a 4.1 percent annual rate of increase in the previous three months, the Commerce Department reported today in Washington. A measure of inflation rose more than expected.

U.S. 10-year Treasuries rose, snapping their longest slump since November. A drop in October auto sales pulled down consumer spending in the quarter. Economists expect improvement this quarter as consumer demand recovers, and that may convince the Federal Reserve that another rate increase on Jan. 31 is needed to keep inflation in check.

``I fully expect the economy to bounce back strongly in the first quarter,'' Ken Mayland, president of ClearView Economics in Pepper Pike, Ohio, said in an interview. ``Auto sales will be stronger and inventories are still very lean, which points to a better first quarter.''

The slowdown from October through December snapped 10 straight quarters of growth exceeding 3 percent. That was the longest such string since the 13 quarters that ended in March 1986. Growth will pick right back up this quarter, to a 3.8 percent annual rate, and average 3.4 percent this year, according to a survey of economists in a Bloomberg survey of economists from Dec. 23 to Jan. 9.

Bush and Economy

Even so, most Americans disapprove of the way President George W. Bush is handling the economy and don't expect an improvement, according to a Bloomberg/Los Angeles Times poll this week.

Economists expected a 2.8 percent gain in GDP last quarter, according to the median estimate of 72 estimates in a Bloomberg News survey. Estimates ranged from 1.9 percent to 3.4 percent. GDP will be revised twice in coming months as more data come in.

The Fed's rate-setting Open market Committee meets next week, and all 56 economists surveyed by Bloomberg News expect a 14th straight quarter-point increase, to 4.5 percent. Investors are divided on the outlook for a further increase when the Fed next meets in March, based on futures trading on the Chicago Board of Trade.

Federal Reserve

``This is a very weak number and well below what everyone expected,'' said Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh, who forecast GDP growth would slow to 2.3 percent. ``It's not the kind of report the Fed likes to see, but I think they'll recognize that the economy is already rebounding and raise the federal funds target rate to 4.5 percent.''

Former Fed Governor Lyle Gramley, now a senior adviser with Stanford Washington Research Group in Washington, said the central bank may increase its target rate once more rather than three times, as he expected a month ago.

The yield on the benchmark 10-year government note fell 3 basis points, or 0.03 percentage point, to 4.49 percent as of 9:49 a.m. in New York.

The economy expanded 3.5 percent for all of last year after 4.2 percent in 2004. GDP increased 3.1 percent in the fourth quarter from the same three months a year earlier. The rise compared to the 3.5 percent forecast that the Fed presented to Congress in July of last year and the 3.5 percent increase estimated by White House economic advisers on Dec. 1.

Poll Findings

The Bloomberg/Los Angeles Times poll showed Americans disapprove of the way Bush is handling the economy by a margin of 59 percent to 37 percent. About six out of 10 people say the economy will stay the same in the next six months, while more say it will worsen than say it will improve.

The value of all goods and services produced by the economy, the world's largest, rose to $11.2 trillion after adjusting for inflation. Unadjusted for price changes, GDP increased at a 4.2 percent annual pace to $12.7 trillion.

Consumer spending, which accounts for about 70 percent of the economy, rose 1.1 percent at an annual rate last quarter, compared with a 4.1 percent pace in the previous three months. The fourth- quarter rate was the slowest since the second quarter of 2001 and compares with an average of 3.4 percent over the last 20 years. Purchases of durable goods fell 18 percent, the biggest drop since 1987.

Government Spending

Government spending fell last quarter at a 2.4 percent annual rate, the biggest drop since 2000, following a 2.9 percent third- quarter increase.

The economy had trouble gaining traction early in the quarter as the Gulf Coast started to recover from Hurricane Katrina. Cars and light trucks sold at a 14.7 million annual rate in October, the fewest since August 1998, after automakers withdrew incentives that extended employee pricing to all customers.

General Motors Corp., Ford Motor Co. and DaimlerChrysler AG's Chrysler unit announced new discount programs in November to help spur sales, which climbed to a 15.7 million annual rate during the month and a 17.2 million rate in December.

Katrina struck Gulf states on Aug. 29, damaging businesses and hindering oil and gas production. The retail price of gallon of regular unleaded gasoline reached $3.057 in early September, according to figures from AAA, the nation's largest motorist organization. It averaged $2.41 a gallon in the fourth quarter, up from $1.95 a gallon in the same three months a year earlier.

Consumer spending will accelerate to a 3.5 percent annual pace this quarter, the median estimate of economists surveyed earlier this month by Bloomberg News.

Momentum

Business momentum is ``very strong'' and sales this month are ``tracking very well,'' said Lew Frankfort, chief executive of Coach Inc., in an interview yesterday. New York-based Coach is the largest U.S. seller of luxury-leather goods.

The government's personal consumption expenditures index, a measure of prices tied to consumer spending, rose 2.6 percent after a 3.7 percent rise in the third quarter. The index excluding food and energy, a measure favored by Fed policy makers, rose at a 2.2 percent annual rate.

U.S. central bankers meet next on Jan. 31. All 39 economists in a Bloomberg survey forecast a quarter-point increase in their benchmark lending rate, to 4.5 percent.

The GDP price index, a measure of prices tied to the report rose at a 3.0 percent annual rate in the fourth quarter, following a 3.3 percent third-quarter gain.

Business Investment

Business fixed investment, which includes spending on commercial construction as well as equipment and software, rose at a 2.8 percent annual rate in the fourth quarter, after rising at an 8.5 percent rate from July through September. Spending on new equipment and software rose 3.5 percent, the smallest increase since the first quarter of 2003, and down from a 11 percent rate in the third quarter.

A Commerce Department report yesterday suggested improved business spending will drive economic growth early this year. Orders for non-defense capital goods excluding aircraft, a proxy for future business investment, rose in December by the most in four months.

``We're a strong economy and we will remain a strong economy,'' U.S. Deputy Treasury Secretary Robert Kimmitt from the World Economic Forum in Davos, Switzerland, before today's report.

Companies added to stockpiles at a $25.7 billion annual rate last quarter after reducing inventories at a $13.3 billion pace in the third quarter. That added 1.45 percentage points to GDP.

Homebuilding

Residential construction rose at a 3.5 percent annual rate last quarter after a 7.3 percent gain the previous three months.

Not all companies expect demand to improve this year.

Chief Executive Officers Rick Goings of Tupperware Brands Corp. and Martin Sorrell of WPP Group Plc said American consumer spending is wavering.

``We think the consumer has a little staying power, but not a lot,'' said Goings of Orlando, Florida-based consumer products maker Tupperware. He made the remarks in an interview in Davos, Switzerland.

Wilmington, Delaware-based DuPont Co., the third-largest U.S. chemical maker, reported a 45 percent drop in fourth-quarter profit and said results this year will miss analyst estimates because of lingering plant disruptions from Hurricane Katrina and higher costs.

``We will continue to face challenging headwinds,'' DuPont Chief Executive Officer Charles O. Holliday Jr. said in a Jan. 24 statement.

Demand for goods and services is on the mend, according to a National Association of Business Economics report this week. The group's survey of 142 companies showed the economy gaining strength after shaking off three hurricanes last year, and more panelists than in the group's October report expected growth to accelerate. Half the companies said they planned to increase capital spending over the next 12 months, up from 48 percent in October, the survey said.

Trade Deficit

The trade deficit widened to $650.3 billion from $617.5 billion in the third quarter. That subtracted 1.18 percentage point from GDP.

The trade gap reached a record $68.1 billion in October.

Applied Materials Inc. Chief Executive Officer Michael Splinter said global spending on consumer electronics has made customers of the world's largest producer of chip-making equipment ``more positive'' about 2006.

``We said in November that we thought our customers would be much more positive in 2006 and I think you can see from some of the public announcements on increased cap ex that it is starting to come true,'' Splinter said, referring to capital expenditures on plant and equipment. Applied Materials is based in Santa Clara, California.

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