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Economy Nearly Stalled in Fourth Quarter
By Jeannine Aversa
The Associated Press
Thursday 27 March 2008
Washington - The economy nearly sputtered out at the end of the year and is
probably faring even worse now amid continuing housing, credit and financial
crises.
The Commerce Department reported Thursday that gross domestic product increased
at a feeble 0.6 percent annual rate in the October-to-December quarter. The
reading - unchanged from a previous estimate a month ago - provided
stark evidence of just how much the economy has weakened. In the prior quarter,
the economy clocked in at a sizzling 4.9 percent growth rate.
The gross domestic product (GDP) measures the value of all goods and services
produced in the United States and is the best barometer of the country's economic
health.
Many economists say they believe growth in the current January-to-March quarter
will be even weaker than the 0.6 percent figure of the previous quarter. A growing
number also say the economy may actually be shrinking now. Under one rough rule,
the economy needs to contract for six straight months to be considered in a
recession. The government will release its estimate for first-quarter GDP in
late April.
"The economy just kept its head above water" in the fourth quarter,
said Nigel Gault, chief U.S. economist at Global Insight. "We think that
GDP will decline, albeit slightly, during the first half of 2008," he said.
"The first half outlook is bleak."
On Wall Street, stocks were down in morning trading.
In another report, fewer people signed up for unemployment benefits last week,
although that didn't change the broader picture of a deteriorating jobs market.
The Labor Department said jobless claims fell by 9,000 to 366,000, a better
showing than many economists were forecasting. Still, unemployment is expected
to rise this year given all the problems clobbering the economy.
The newly released fourth-quarter GDP figure matched analysts' expectations.
Thursday's report underscored the damage to the economy from the collapse in
the housing market, which has dragged down housing prices, pushed home foreclosures
up to record highs and has led to a glut of unsold homes.
Against that backdrop, 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.
To limit the damage from the crises, the Federal Reserve has taken a number
of extraordinary actions. It has slashed a key interest rate over the last two
months by the most in a quarter century. And to relieve turmoil on Wall Street,
which intensified after the crash of the country's fifth-largest investment
firm, Bear Stearns, the Fed has resorted to its greatest expansion of lending
authority since the 1930s. Big securities firms will temporarily be allowed
to go to the Fed directly for loans - a privilege that had been afforded
only to commercial banks.
With the nation's economic woes a top concern for voters, the White House and
Democrats in Congress have been scrambling to provide relief. Democratic presidential
candidate Barack Obama on Thursday called for an overhaul of financial regulations.
Consumers, whose spending is indispensable to the economy's vitality, boosted
buying at a 2.3 percent pace in the fourth quarter. That was better than the
1.9 percent growth rate previously estimated but still marked a slowing from
the third quarter's 2.8 percent pace.
Businesses - nervous about customers' waning appetite to buy given all
the problems in the economy - cut back sharply on their inventories of
unsold goods. That shaved 1.79 percentage points off fourth-quarter GDP, the
most in more than two years.
Spending by businesses on equipment and software, meanwhile, rose at a pace
of 3.1 percent in the final quarter of last year. That was slightly less than
previously estimated and marked a slowdown from the prior quarter's 6.2 percent
growth rate.
Businesses' profits also took a hit in the final quarter. A measure linked
to the GDP report showed that after-tax profits fell 3.3 percent at the end
of last year, after being flat in the prior quarter.
There was a bright spot in the mostly gloomy report, however. Sales of U.S.
goods and services to other countries grew at a 6.5 percent pace. That was better
than the 4.8 percent growth rate previously estimated, although it was down
sharply from the prior quarter's blistering 19.1 percent growth rate.
U.S. exports have been helped by the sinking value of the U.S. dollar, which
makes U.S. goods less expensive to foreign buyers. The U.S. dollar recently
plunged to record lows against the euro and has fallen sharply against the Japanese
yen.
The drooping dollar can aggravate inflation pressures.
An inflation measure linked to the GDP report showed that overall prices increased
at a rate of 3.9 percent in the fourth quarter. That was not as high as previously
estimated but marked a big pickup from the third quarter's 1.8 percent pace.
Another gauge showed that "core" prices - excluding food and
energy - grew at a rate of 2.5 percent at the end of last year. That was
down from a previous estimate of a 2.7 percent pace but was up from the prior
quarter's 2 percent growth rate.
The new core inflation figure is above the Fed's comfort zone - the upper
bound of which is a 2 percent inflation rate.
Although the Fed's No. 1 job is trying to save the economy from a deep and
prolonged recession, it is also keeping close tabs on inflation and soaring
energy prices.
Oil prices are topping $105 a barrel. Gasoline prices have marched higher,
too. High energy prices can spread inflation if lots of companies boost prices
charged to customers for a wide range of goods and services. High energy prices
also can be a drag on overall economic growth by crimping consumer spending.
The combination of slowing economic growth and rising inflation make the Fed's
job more difficult. It also has raised fears the country may be headed for a
bout of stagflation, a scenario the U.S. hasn't experienced since the 1970s.
Fed Chairman Ben Bernanke, however, has said that's not the case.
The Fed's rate reductions along with the government's $168 billion stimulus
package of tax rebates for people and tax breaks for businesses should help
revive economic growth in the second half of this year, economists said.
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