U.S. GDP grew in 4Q
Wednesday, January 30th 2002, 12:00 am
By: News On 6
(NEW YORK) - The U.S. economy unexpectedly grew in the fourth quarter, the government said Wednesday, bucking widespread forecasts for contraction after the Sept. 11 terrorist attack.
Gross domestic product, the broadest measure of the U.S. economy, grew at a 0.2 percent annual rate, the Commerce Department said, after shrinking at a 1.3 percent rate in the third quarter. For the entire year, GDP rose only 1.1 percent, the weakest showing since the economy shrank 0.5 percent in 1991, as the last recession was ending.
Strong auto sales and a nearly 10 percent jump in government spending in response to the Sept. 11 attacks gave the economy a boost in the fourth quarter, well past the 1.1 percent drop economists surveyed by Briefing.com had forecast.
"The worst is over. We're on the road to recovery," said Bill Cheney, chief economist at John Hancock Financial Services.
The small gain in GDP -- a number that will be revised twice more by the government in coming months -- means the economy avoided the standard definition of a recession, two or more straight quarters of declining economic activity.
On the other hand, economists at the National Bureau of Economic Research, who use data such as employment and personal income to define a recession, said last year that a recession began in March, and Wednesday's GDP data does not change that opinion.
"That does not effect us in any way," an NBER spokeswoman said. "[The economists] stick to their guns about their choice."
On Wall Street, stocks prices fell again after Tuesday's big declines. Treasury bond prices also fell.
Lower tax rates and tax refund checks received by many Americans in the fourth quarter helped boost consumer spending 5.4 percent, the department said. Spending on durable goods jumped 38.4 percent in the quarter, led mostly by auto sales, which saw a record sales pace in October, sparked by zero-interest financing incentives from major automakers.
"Certainly those auto incentives were helpful in giving us that growth in the fourth quarter," said Wayne Ayers, chief economist for Fleet Boston Financial Corp., in an appearance on CNNfn's Before Hours program. "But we have to remember that even outside of autos, the consumers have really hung in there. I don't think it's entirely a fluke. I don't think it accounts for the ongoing strength of the consumer."
But consumer spending and further economic growth could be limited, since spending has never really slacked off enough to build up demand, and about 1.4 million people have lost their jobs in recent months, while others are worried about their jobs.
Recognizing this, President Bush in his first State of the Union address Tuesday night, pledged that jobs would be one of his top priorities, and challenged Congress to pass a bill extending unemployment benefits and giving tax cuts to spur business investment, which tumbled 11.1 percent in the fourth quarter.
Still, the need for additional stimulus was questioned last week by Federal Reserve Chairman Alan Greenspan, who cited growing signs that the economy was close to mounting a recovery. The Fed is holding the second day of a two-day meeting Wednesday on the economy and most analysts expect the central bank to hold rates steady after 11 rate cuts last year designed to spur growth.
If anyone was still expecting a Fed rate cut before, they're certainly going to throw that out the window," Corey Redfield, fixed income strategist at U.S. Bancorp Piper Jaffray, told Reuters.
In its report, the Commerce Department said imports fell 3.4 percent in the quarter, led by lower oil consumption and energy prices. Lower imports give a boost to GDP since imports tend to displace domestic production. Exports, on the other hand, plunged 12.4 percent.
More encouragingly, businesses slashed $120.6 billion from inventories in the quarter. That cut 2.23 percentage points from GDP, but also set the stage for future growth. Once businesses work off their glut of unsold goods, the hangover from a spending and production boom in the late 1990s and early 2000, they will be free to increase production again.
"This liquidation has been so sharp, so severe, not just in this last quarter, but over the past year, that even with a modest pickup in demand, production is almost bound to increase as we move through the balance of this year," Ayers said.