U.S. Economy Grew at a 2.5% Annual Rate in the Fourth Quarter
By Shobhana Chandra
March 29 (Bloomberg) -- The U.S. economy grew at an annual rate of 2.5 percent in the fourth quarter, hobbled by slumps in home construction and business investment that show no sign of ending.
The final revision to gross domestic product, the sum of all goods and services produced, compares with a 2.2 percent rate reported last month, the Commerce Department said today in Washington. A measure of inflation watched by the Federal Reserve rose less than forecast.
Increasing subprime loan defaults and foreclosures threaten to deepen a housing slowdown that last quarter was already the worst in more than 15 years. Coupled with a drop in corporate profits and less business investment, the economy may not be able to attain Federal Reserve Chairman Ben S. Bernanke's forecast of ``moderate'' growth.
``Capital spending is in a funk, and the housing recession is ongoing,'' Cary Leahey, senior economist at Decision Economics in New York, said before the report. ``Growth could be slower this quarter.''
For all of last year, the economy grew 3.3 percent, compared with 3.2 percent in 2005. The third quarter's growth rate was 2 percent.
Economists surveyed by Bloomberg News had forecast fourth- quarter growth at 2.2 percent, according to the median of 75 estimates. Estimates ranged from 2 percent to 2.5 percent.
Home construction fell at an annual rate of 19.8 percent, the most since 1991, after an 18.7 percent drop the previous three months. The decline subtracted 1.2 percentage points from growth.
Housing Slump
The housing slowdown remains one of the biggest concerns this year, economists said. New-home sales unexpectedly fell last month to the lowest level in almost seven years, a government report this week showed. While February housing starts rebounded in February from a nine-year low, building permits, a sign of future construction, declined.
Rising defaults by subprime mortgage borrowers, or those with poor or limited credit histories, are damping prospects for a quick housing recovery. More foreclosures increase the possibility that builders and sellers will have to compete with a bigger glut of properties on the market, pushing down prices.
Fed Chairman Ben S. Bernanke yesterday said the damage from the mortgage crisis would be limited and maintained the central bank's growth forecasts.
The subprime fallout ``is likely to be contained,'' and ``the economy appears likely to continue to expand at a moderate pace over coming quarters,'' Bernanke told lawmakers yesterday.
Lennar Earnings
So far, builders see no improvement. Lennar Corp., the largest U.S. homebuilder by revenue, this week reported a 73 percent plunge in fiscal first quarter earnings, and said it may miss its 2007 profit goal.
``Market conditions are very difficult across the country,'' Miami-based Lennar's Chief Executive Officer Stuart Miller said on a conference call. ``It is unclear today where there is another shoe to drop.''
A bigger increase in inventory than previously estimated was the main reason for today's GDP revision. Stockpiles rose at an annual rate of $22.4 billion, compared with last month's $17.3 billion estimate. Inventories grew at a $55.4 billion pace in the third quarter. Inventories subtracted 1.2 percentage points from economic growth, less than the 1.4 percentage points previously estimated.
Companies also tightened their purse strings. Business fixed investment, which includes spending on commercial construction as well as equipment and software, fell at an annual rate of 3.1 percent in the fourth quarter, compared with a 10 percent increase the prior quarter.
Less Investment
The same reluctance to invest this quarter may continue to hinder growth, economists said.
Orders for durable goods excluding transportation unexpectedly fell for a second month in February, Commerce reported yesterday. Orders for non-defense capital goods excluding aircraft, a proxy for future business investment, also declined, the report showed.
``First-quarter growth will be weaker,'' Robert Mellman, an economist at JPMorgan Chase & Co. in New York, said before the report. ``February numbers looked pretty terrible across the board.''
Consumer spending, which accounts for more than two-thirds of the economy, remained the one bright spot. It expanded at a 4.2 percent annual pace in the fourth quarter after a 2.8 percent gain in the third quarter. Consumer spending added 2.9 percentage points to growth.
Profits Dropped
Today's GDP report included a first look at corporate profits for the quarter. Earnings adjusted for the value of inventories and depreciation of capital expenditures, known as profits from current production, fell 0.3 percent to an annual rate of $1.65 trillion. Profits rose 3.9 percent in the third quarter. For all of last year, profits were up 21 percent.
``Less forward momentum in corporate profits, combined with a mixed outlook for growth in 2007, is expected to put a damper on the growth of business investment in 2007,'' said Brian Bethune, an economist at Global Insight Inc. in Lexington, Massachusetts.
Former Fed Chairman Alan Greenspan, citing concern about slowing profit margins, said this month there's a ``one-third probability'' of a recession this year and the current expansion won't have the staying power of its decade-long predecessor.
For Fed policy makers, inflation is a ``greater risk'' than slowing growth, Bernanke said yesterday.
Today's report showed the core personal consumption expenditures price index, a measure of prices tied to consumer spending and excluding energy and food, rose at an annual rate of 1.8 percent last quarter, down from a previous estimate of 1.9 percent. The index, which is watched by the Fed, rose at a 2.2 percent rate in the third quarter.
The overall GDP price index rose at an annual rate of 1.7 percent in the fourth quarter, compared with a 1.9 percent third- quarter gain.
To contact the report on this story: Shobhana Chandra in Washington
schandra1@bloomberg.net
Last Updated: March 29, 2007 08:30 EDT
Enviado: 29/3/2007 13:14