Economy staggers to slow finish for year


Published: Saturday, January 28, 2006 at 6:01 a.m.
Last Modified: Friday, January 27, 2006 at 11:45 p.m.
WASHINGTON- The economy slowed to a near crawl in the final quarter of 2005, a listless showing that was the worst in three years. However, growth was respectable for the year and is expected to perk up again soon.
Gross domestic product clocked in at an annual rate of just 1.1 percent from October through December. That marked a loss of speed compared with the third quarter's brisk 4.1 percent pace, the Commerce Department reported Friday.
Belt tightening by consumers, businesses and the government figured into the fourth quarter's slowdown.
GDP, which measures the value of all goods and services produced within the United States, is the best barometer of the economy's fitness.
Even with the feeble finish, the economy logged growth of 3.5 percent for all of 2005 - a year when the country coped with fallout from lofty energy prices and the devastating Gulf Coast hurricanes. Analysts called the GDP figure for all of 2005 solid, although it was down from 2004's 4.2 percent gain.
''Considering the impact of the hurricanes and record heating bills last year, the economy continues to show remarkable resilience,'' said Bill Cheney, chief economist at John Hancock Financial Services.
In a second report, the Commerce Department said new home sales in 2005 climbed to an all-time high, marking the fifth year in a row of record sales. Sales of new single-family homes totaled 1.28 million units last year, a 6.6 percent increase over 2004's sales.
The roaring housing market has helped to bolster the economy, but analysts expect the sector to lose steam this year. They're hoping the slowdown will be moderate. A big drop in home sales and house prices could pose dangers for the overall economy.
Looking at the fourth quarter, economists felt the slowdown was more of a temporary setback rather than a harbinger of a sustained period of economic troubles ahead.
''The economy hit a pothole in the fourth quarter. I'm not at all worried about the health of the economy,'' said Mark Zandi, chief economist at Moody's Economy.com.
Zandi believes the economy in the current January-to-March quarter is already doing better and predicts growth will come in around a 4 percent pace. For all of 2006, analysts project economic growth to top 3 percent.
On Wall Street, stocks surged on a fresh round of strong earnings reports. The Dow Jones industrials gained 97.74 points to close at 10,907.21.
President Bush, in his State of the Union address Tuesday evening, plans to spotlight some pocketbook issues, including high energy prices, tax cuts and expensive health care. Public concern about the economy is still relatively high, polls indicate. The GDP report gave both Republicans and Democrats ammunition.
''We know the economy is not in real good shape. We have the price of oil, which is volatile, going up and down, up and down. We know that the deficit is staggering,'' said Senate Minority Leader Harry Reid, D-Nev.
Treasury Secretary John Snow countered that the ''economic fundamentals point to continued strong economic performance in the United States in 2006.'' He called the fourth-quarter's weak showing ''somewhat anomalous'' and said he wouldn't read too much into it.
Consumers turned cautious in the final quarter as high energy prices and rising borrowing costs took a toll on their budgets. Their spending grew at a 1.1 percent pace, the slowest since the second quarter of 2001 when the economy was suffering through a recession.
Most of the weakness came as people sharply cut back on purchases of big-ticket ''durable'' goods, such as cars. This spending dropped by a hefty 17.5 percent rate, the sharpest decline since the first quarter of 1987.
Businesses also were more restrained, boosting spending on equipment and software at a 3.5 percent rate in the fourth quarter, the smallest since the first quarter of 2003.
Another factor restraining overall GDP in the fourth quarter: federal government spending, which fell at a 7 percent rate, the biggest drop since the third quarter of 2000. Analysts, skeptical about this decline, believed it would be reversed, especially given spending related planned for the war in Iraq and hurricane cleanup and rebuilding.
While growth slowed in the fourth quarter, inflation picked up, according to one price measure in the report that is closely watched by the Federal Reserve.
''Core'' prices - excluding food and energy costs - rose at a 2.2 percent rate in the fourth quarter, up from a 1.4 percent growth rate in the third quarter. This suggests inflation is filtering into a variety of other prices.
To combat inflation, the Fed is expected to boost interest rates next Tuesday one-quarter percentage point to 4.50 percent.
It will be last meeting for Alan Greenspan, who will retire that day after more than 18 years at the helm of the central bank. Ben Bernanke, who is slated to succeed Greenspan, would lead his first meeting to consider interest rate policy on March 28. The Senate is expected to vote on Bernanke's nomination Tuesday.
''The new Fed chair will be tested right off the bat. The economy is slowing, though clearly not as rapidly as the headline number would have you think. ...At the same time, inflation is slowly accelerating,'' said Joel Naroff, president of Naroff Economic Advisors.
In a second report, the Commerce Department said new home sales in 2005 climbed to an all-time high, marking the fifth year in a row of record sales. Sales of new single-family homes totaled 1.28 million units last year, a 6.6 percent increase over 2004's sales.
The roaring housing market has helped to bolster the economy, but analysts expect the sector to lose steam this year. They're hoping the slowdown will be moderate. A big drop in home sales and house prices could pose dangers for the overall economy.

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