Economy falls flat last quarter


Published: Friday, January 31, 2003 at 6:01 a.m.
Last Modified: Thursday, January 30, 2003 at 10:25 p.m.

Facts

ON THE WEB:

  • GDP: http://www.commerce.gov/

  • WASHINGTON - The economy faltered in the final quarter of last year as consumers - nervous about a war with Iraq and their own job prospects and stock portfolios - turned cautious and increased their spending by the smallest amount in nearly a decade.
    Gross domestic product rose at an annual rate of just 0.7 percent in the fourth quarter, a dramatic slowdown from the previous quarter's solid 4 percent growth rate and ending 2002 on a sour note, the Commerce Department reported Thursday.
    GDP measures the total value of goods and services produced within the United States and is considered the broadest barometer of the economy's health.
    "One quarter we're soaring, the next we're flat on our back. That was the story of 2002," said Joel Naroff, president of Naroff Economic Advisors.
    The performance - weaker than analysts were predicting - gave the fourth quarter the distinction of being the worst quarter for GDP in 2002. It also marked the weakest showing since the economy actually shrank at a 0.3 percent rate in the third quarter of 2001 as the country was mired in its first recession in a decade.
    While the report highlighted the economy's struggles to get back on sure footing, economists didn't view the tepid fourth quarter performance as a sign that economy was going to backslide into recession.
    In fact, analysts believe the economy is picking up momentum in the current quarter, expanding at a rate of 2.5 percent to 3 percent.
    "If the Iraq situation is resolved quickly and favorably, there's a good chance of unlocking the economy's potential and removing the uncertainty hanging over consumers and businesses," said Lynn Reaser, chief economist at Banc of America Capital Management.
    For all of 2002, the economy grew by a decent 2.4 percent, a big improvement over the tiny 0.3 percent rise registered in 2001, but still considered weaker-than-normal growth for the U.S. economy.
    President Bush, who doesn't want economic woes to linger as he prepares for his 2004 re-election bid, has proposed a 10-year, $674 billion economic stimulus plan - all but $4 billion involving tax cuts. Democrats have their own, smaller-scale plans.
    Commerce Secretary Don Evans said the GDP report underscores the need for Congress to enact the president's plan and shows "that our nation's economy is not yet growing at its fullest potential."
    But Democrats argued that the president's plan would do little to help the economy in the short term but would put the plunge the federal budget into even more red ink.
    "This is a collision course with fiscal calamity and the administration seems to be digging the hole deeper at every turn, adding tax cut on top of tax cut, not offset by spending reductions," said Sen. Kent Conrad, D-N.D.
    The Federal Reserve decided Wednesday to hold a key interest rate at a 41-year low of 1.25 percent, hoping that will spur consumers and businesses to spend and invest more, bolstering economic growth.
    At the Fed's meeting in December, policy-makers said fiscal stimulus might be helpful to help the fragile economy.
    "Added fiscal stimulus might prove to be a useful complement to an accommodative monetary policy in the period immediately ahead when economic activity was likely to remain below the economy's potential," according to minutes of the Dec. 10 meeting released Thursday.
    The Fed opted to hold rates steady at that meeting, which took place weeks before Bush unveiled his stimulus package.
    Consumers - the main force keeping the economy going - got tired in the fourth quarter. They increased their spending during the period at only a 1 percent rate, the worst showing since the first quarter of 1993 and down from a brisk 4.2 percent growth rate in 2002's third quarter.
    The weakness reflected a sharp 7.3 percent cut in spending on durable goods, such as cars and appliances. That was a big turnaround from the astounding 22.8 percent rate of increase in the third quarter and marked the largest reduction in spending on durable goods since the first quarter of 1991.
    A pair of economic reports from the Labor Department suggested the lackluster economy is taking its toll on workers.
    New claims for unemployment benefits last week rose by a seasonally adjusted 14,000 to 397,000, the highest level in a month. And workers' total compensation - wages and benefits - increased last year by just 3.4 percent, the smallest gain since 1999.
    For the economy to fully recover, a sustained turnaround in business investment is necessary, economists said.
    There was some encouraging news on that front. After eight straight quarters of cutting capital spending, businesses boosted such investment at a 1.5 percent rate in the fourth quarter, the best showing since the third quarter of 2000. In the third quarter, capital spending by business declined by an 0.8 percent rate.
    All of the strength, however, came from spending on equipment and software. Companies continued to cut investment in new plants and buildings.
    With war worries and other uncertainties, businesses have been reluctant to make big commitments in hiring and in capital investment.
    Businesses added less to their stockpiles of unsold goods in the fourth quarter, restraining economic growth. The bloated trade deficit also was a drag on fourth-quarter GDP.

    Reader comments posted to this article may be published in our print edition. All rights reserved. This copyrighted material may not be re-published without permission. Links are encouraged.

    Comments are currently unavailable on this article

    ▲ Return to Top