Economy stronger in fourth quarter

Growth counters a midyear slump

February 01, 2007|By Joel Havemann | Joel Havemann,Los Angeles Times

WASHINGTON -- The economy roared back from a midyear slump by growing at an annual rate of 3.5 percent in the final three months of 2006, the government reported yesterday.

The economy opened last year on a strong note, growing at a 5.6 percent pace, the fastest spurt in 2 1/2 years. But it lost steam to a 2.6 percent pace during the spring and declined to about 2 percent last summer. Nevertheless, inflation fell from an annual rate of 2.2 percent in the third quarter to 2.1 percent in the fourth quarter, the Commerce Department said.

For all of 2006, the gross domestic product (GDP) increased by 3.4 percent. That was an improvement from a 3.2 percent showing in 2005 and was the best performance in two years.

That's even more impressive considering the economy was hit by the housing slump. Investment in home building for all of last year was slashed by 4.2 percent, the most in 15 years.

GDP measures the value of all goods and services produced within the United States and is the best barometer of the country's economic standing.

The fresh snapshot of business activity underscored the resilience of the economy; it has managed to keep on moving despite the ill effects of the residential real estate bust and an ailing automotive sector.

And the economy's performance in the October-to-December quarter exceeded analysts' forecasts for a 3 percent growth rate.

In a separate report, the Labor Department said employment costs to businesses increased by 0.8 percent in the fourth quarter, down from 1 percent in the previous three months.

The Fed's policymaking Federal Open Market Committee, which had raised interest rates consistently from mid-2004 to mid-2006, left the federal funds rate, the interest that banks charge each other, unchanged yesterday at 5.25 percent, where it has been since June.

In a statement, the Fed seemed concerned about economic growth and inflation.

"Readings on core inflation [excluding food and energy] have improved modestly in recent months, and inflation pressures seem likely to moderate over time," the open market committee said. "However, the high level of resource utilization has the potential to sustain inflation pressures.

"The committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."

President Bush lost little time broadcasting the economic growth news. In a speech to the Association for a Better New York, he said, "America's businesses and entrepreneurs are creating new jobs every day. Workers are making more money - their paychecks are going further. Consumers are confident, investors are optimistic. Just today, we learned that America's economy grew at an annual rate of 3.5 percent in the fourth quarter of 2006."

The 3.5 percent growth rate outpaced the predictions of most private economists.

Ian Shepherdson, chief U.S. economist of High Frequency Economics, said the economy owed much of its surprising growth to foreign trade - the U.S. trade deficit, though still enormous, was less than expected.

The biggest drag on economic growth was the housing sector. Residential housing construction fell 30 percent from the third quarter to the fourth; that had the effect of shaving 1.2 percentage points off overall economic growth in the fourth quarter.

The personal savings rate remained negative, as it has been for two years. Americans spent 1 percent more than they earned in the fourth quarter of last year, the Commerce Department said.

Joel Havemann writes for the Los Angeles Times. The Associated Press contributed to this article.

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