US economic growth slows sharply in Q4

Jeff Bater, Dow Jones Newswires | January 31, 2008

The US economy stumbled at the end of 2007, hobbled by the sick housing sector.

Gross domestic product rose at a seasonally adjusted 0.6 per cent annual rate in the December quarter, the Commerce Department said.

The limping pace was much slower than the third-quarter's racing 4.9 per cent and second-quarter's 3.8 per cent surge. Still, the crawl forward did mean the economy didn't decline in the fourth quarter.

"The collapse in housing restrained growth greatly but otherwise, the economy actually didn't do that badly at the end of 2007," said Joel Naroff, who runs an economic consulting firm. "The economy came to a screeching halt at the end of last year, but that does not mean we are in or even headed for a recession."

A recession is defined as two consecutive quarters of economic decline.

The 0.6 per cent gain was far below expectations on Wall Street, which forecast 1.2 per cent GDP growth.

"We're not happy with 0.6 per cent GDP growth," said Commerce Secretary Carlos Gutierrez. "This is exactly why the president proposed the stimulus package and is why we need it as soon as possible."

GDP acts as a scoreboard for the economy by measuring the market value of all goods and services produced. Its housing component, residential fixed investment, tumbled by 23.9 per cent in the fourth quarter, reducing overall GDP growth by 1.18 percentage points.

"I don't think you can get a recession just out of a fall-off of new homebuilding (a 4 per cent share of the economy) and a modest destocking of inventories," said Ken Mayland, who also runs an economic consulting firm.


Still, the 23.9 per cent plunge in residential fixed investment marked the worst drop since a 35.1 per cent tumble in the fourth quarter of 1981. "Because the housing decline and credit situation have intensified in recent months, the outlook for (first quarter) growth is worrisome," Insight Economics analyst Steven Wood said.

The biggest GDP component, consumer spending, decelerated in the fourth quarter, rising 2.0 per cent after increasing 2.8 per cent in the third quarter. Overall, consumer spending contributed 1.37 percentage points to GDP in the October through December period; it had contributed 2.01 percentage points in the third quarter.

International trade contributed 0.41 percentage point to GDP in the fourth quarter. US exports increased 3.9 per cent and imports increased 0.3 per cent. In the third quarter, trade had added 1.38 percentage points to GDP; exports in that period were 19.1 per cent higher and imports rose by 4.4 per cent.

Fourth-quarter business spending rose 7.5 per cent. Businesses liquidated inventories. Stockpiles of all goods decreased $US3.4 billion, after going up $US30.6 billion in the third quarter. The drawdown subtracted 1.25 percentage points from GDP.

"The (fourth quarter) GDP report does not make us feel any gloomier," said Nigel Gault, an economist at Global Insight. "Why? Inventory accumulation was a big negative for fourth-quarter growth, but that suggests that companies are keeping their inventories lean, making it less likely that they will need to slash production in future."

(Source: The Australian, 2008)