Growth rate is revised down

Estimate for 4Q drops to 2.2% from 3.5% annually

Growth rate revised down

March 01, 2007|By James P. Miller | James P. Miller,CHICAGO TRIBUNE

Government officials revised their estimate of the U.S economy's fourth-quarter growth sharply lower yesterday, to a lackluster 2.2 percent annual rate from 3.5 percent, as initial estimates of U.S. corporations' inventory plans proved overly optimistic.

Although the Commerce Department routinely revises its quarterly estimates of the nation's gross domestic product, yesterday's markdown was the biggest change in 13 years.

Nonetheless, the new figure was precisely in line with economists' expectations, and it generated little stir on Wall Street or among economists.

The lower GDP reading doesn't represent much of an improvement over the subpar 2 percent annual rate the economy recorded in the third quarter of 2006.

But it did provide additional evidence, if any was needed, that the economy has slowed in response to the Federal Reserve's earlier campaign of interest-rate increases. The revised data also offered a hint that inflationary pressures might be easing.

The Commerce Department's Bureau of Economic Analysis regularly revises its quarterly GDP calculations, because early estimates, by necessity, include a large amount of guesswork. When the bureau issues its "advance" GDP figure for a given quarter, about a month after the end of the three-month period, officials have a reasonable feel for much of the data from the quarter's first two months but are less sure of the final month.

Why? The process of compiling and analyzing the dense mass of statistics used in figuring the GDP is so time-consuming that the bureau must rely to a significant extent on estimates regarding the quarter's final month.

Later, they fine-tune the data. Approximately two months after a quarter ends, the Commerce Department unit issues what's known as its "preliminary" GDP reading, as it did yesterday. A month from now, it will issue a final version with even better-massaged data.

Because a raft of economic reports comes out between the advance and the preliminary GDP reports, economists can generally fine-tune their own spreadsheets right along with government officials.

Most experts had accurately called yesterday's revised reading of 2.2 percent. Still, Nomura Securities economist David Resler noted in an interview, "It's not routine for them to move the GDP measure this much" from one month to the next. The government's financial model, he said, proved to be "pretty much off the mark" regarding the final quarter of 2006.

Using evidence that housing and capital spending are still soft, Resler said yesterday that he has lowered his forecast for first-quarter GDP growth to a relatively sluggish 2.1 percent rate from his previous 2.7 percent estimate.

Other data seemed to support that view. For example, the median sales price of a new home - the point at which half sell for more and half for less - dropped to $239,800 in January, down 2.1 percent from the same month last year. Investment in home building in the fourth quarter was slashed by 19.1 percent on an annualized basis, the steepest decline in 15 years.

Nevertheless, experts think the economy can grow at a long-term trend of about 3 percent annually. In recent years, GDP growth has topped that rate, though it fell below it in the last three quarters of 2006. Still, there is little evidence the economy's growth will stall outright.

When the Fed launches a full-scale campaign to fight inflation by raising interest rates, the result is always either a slowdown or a recession, noted Ken Mayland of ClearView Economics.

"Obviously, slowdowns are preferred over recessions," he said. "The Fed has to be happy with these results."

The bulk of the government's miss relates to its forecast of the extent to which companies would expand their inventories. A month ago, Commerce Department officials had estimated that inventories grew by $35.3 billion, but yesterday that figure was revised to just $17.3 billion.

Companies generally build up their inventory of wholesale products when they think business will be expanding and slow or reverse that buildup when expectations of future marketplace conditions begin to darken.

The inventory adjustment was the biggest downward drag on the revision, acknowledged Economic Outlook Group economist Bernard Baumohl. But he argues that the more important category to follow is what's known as the "personal consumption expenditures," which strengthened in the fourth quarter.

That increase, he said, indicates that consumers "absolutely" remain in a spending mood.

James P. Miller writes for the Chicago Tribune.

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