Spending Boosts Economic Growth

Thursday, February 28th 2002, 12:00 am

By: News On 6

(WASHINGTON) - The U.S. economy grew in the fourth quarter at its fastest pace in a year, powered by the biggest jump in consumer spending on cars and other big-ticket goods since 1986, the government reported Thursday.

The latest snapshot of the economy's health as measured by the gross domestic product suggests that the recession, which began in March, has probably ended and may turn out to be the country's mildest downturn ever, analysts said.

That's consistent with the economic assessment Federal Reserve Chairman Alan Greenspan provided to Congress one day earlier, though Greenspan cautioned that the recovery will probably be modest.

GDP, the total output of goods and services produced within the United States, grew at an annual rate of 1.4 percent in the final quarter of 2001, considerably stronger than the 0.2 percent growth rate first estimated, the Commerce Department said.

The better-than-expected fourth quarter performance came after the economy shrank at a rate of 1.3 percent in the third quarter.

"This is a recessionette, said Tim O'Neill, chief economist at Bank of Montreal.

Economists are estimating the economy grew in the current January-March quarter at a rate of 1.5 percent to 3.5 percent.

White House spokesman Ari Fleischer said the latest GDP numbers are promising but Congress still needs to provide relief. "They are encouraging signs but they are not good enough for President Bush to say we no longer need to help America's workers,'' Fleischer said.

Because consumers, the lifeblood of the economy, kept buying throughout the slump, they will have less pent-up demand, meaning their spending probably won't rise as quickly as in past rebounds, thus making the recovery less robust than usual, Greenspan and other economists said.

"We won't get a sharp recovery because we didn't have the pullback that we normally see so there isn't the room for advancement that we normally see," said Carl Tannenbaum, chief economist at LaSalle Bank/ABN AMRO.

In the fourth quarter, consumers, whose spending accounts for two-thirds of all economic activity in the United States, ratcheted up spending on costly manufactured goods, including cars, at a rate of 39.2 percent in the fourth quarter. That was the biggest increase since the third quarter of 1986. Zero-percent financing offers motivated buyers and sent car sales soaring during the quarter, analysts said.

Total spending by consumers rose at a brisk 6 percent rate in the fourth quarter, the largest gain since the second quarter of 1998. The government had previously estimated consumer spending rose at a 5.4 percent rate in the final three months of 2001.

Another factor contributing to the stronger fourth-quarter GDP was more brisk government spending, which rose at a rate of 10.1 percent, compared with a 0.3 percent growth rate in the third quarter. Economists said the increase reflects a big rise in federal spending on the war in Afghanistan and to improve security at home.

The trade deficit in the fourth quarter was also less of a drag on the economy than the government previously thought. The deficit reduced fourth-quarter GDP by 0.35 percentage point, rather than 0.85 percentage point as initially reported.

Businesses continued to cut back on spending on new plants and equipment and in the fourth quarter they reduced such investment at a rate of 13.1 percent, one of the biggest reasons for the economy's weakness.

Companies reduced excess stocks of unsold goods in the fourth quarter at a record rate of $120 billion, another factor holding back economic growth. While inventory liquidation reduces the GDP, economists say companies must get rid of excess stocks before they can crank up production in the future.

Based on the current GDP data, the drop in economic output during the recession is a small 0.3 percent, which would make this the mildest recession in U.S. history. That record has been held by the 1969-1970 recession, when GDP fell by 0.6 percent. Economists believe the National Bureau of Economic Research, the official arbiters of when recessions begin and end, will declare this one ended in December, January or February.

Separately, the Labor Department said the four-week moving average of new claims for unemployment benefits, which smoothes out weekly fluctuations, fell to a six-month low of 373,250 last week, another sign the economy is improving.

"The recovery is now," declared ClearView Economics President Ken Mayland.

On the Net:

GDP: home.doc.gov