US growth quickens, but speed bumps ahead
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US growth quickens, but speed bumps ahead

Last Updated: Friday, January 27, 2012, 22:52
 
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US growth quickens, but speed bumps ahead
Washington: The US economy grew at its fastest pace in 1-1/2 years in the fourth quarter of 2011, but a strong rebuilding of stocks by businesses and a slower pace of business spending hinted at softer growth early this year.

US gross domestic product expanded at a 2.8 percent annual rate, the Commerce Department said on Friday, a sharp acceleration from the 1.8 percent clip of the prior three months and the quickest pace since the second quarter of 2010.

It was, however, a touch below economists expectations in a Reuters poll for a 3 percent rate, and two-thirds of rise in output was due to the build-up in business inventories.

Soft underlying demand and a sharp slowing in core inflation supported the Federal Reserve's decision to keep in place an ultra easy monetary policy to nurse the recovery.

"We do not expect growth to accelerate meaningfully from its current pace," said Michelle Girard, a senior economist at RBS in Stamford, Connecticut. She said Fed officials would focused on slack in the economy.

Stocks on Wall Street opened lower as investors worried about the composition of growth, while Treasury debt prices were little changed. The dollar fell against a basket of currencies.

Inventories rebound

The economy in the fourth quarter got a temporary boost from the rebuilding of business inventories, which logged the biggest increase since the third quarter of 2010. The buildup followed a third quarter decline that was the first since late 2009.

Excluding inventories, the economy grew at a tepid 0.8 percent rate, a sharp step-down from the prior period's 3.2 percent pace and a sign of weak domestic demand.

The robust stock accumulation suggests the recovery will lose a step in early 2012 as businesses are unlikely to keep building inventories at the same rate.

Growth in business spending on capital goods was the slowest since 2009, a sign the debt crisis in Europe was starting to take its toll and another hint of weakness ahead.

The Fed on Wednesday said it expected to keep interest rates at rock bottom levels at least through late 2014, and Chairman Ben Bernanke said the central bank was mulling further asset purchases to speed the recovery.

The central bank warned the economy still faced big risks, a suggestion the euro zone debt crisis could still hit hard.

"We're still repairing the damage done by the financial crisis. On top of that we face a more challenging world. We have a lot of challenges ahead in the United States," U.S. Treasury Secretary Timothy Geithner said at the World Economic Forum in Davos.

Prospects of sluggish growth could hurt President Barack Obama's chances of re-election in November.

The economy grew 1.7 percent in 2011 after expanding 3 percent the prior year, and the unemployment stood at a still-high 8.5 percent in December.

Consumer spending, which accounts for about 70 percent of US economic activity, stepped up to a 2 percent rate from the third-quarter's 1.7 percent pace - largely driven by pent-up demand for motor vehicles.

The Japanese earthquake and tsunami had disrupted supplies early last year, leaving showrooms bereft of popular models.

Consumers also benefited from a moderation in inflation.

A price index for personal spending rose at a 0.7 percent rate in the fourth-quarter, the slowest increase in 1-1/2 years, after rising at a 2.3 percent pace in the July-September period.

A core inflation measure, which strips out food and energy costs, increased at a 1.1 percent rate after rising 2.1 percent in the third quarter. The slowdown could concern the Fed, which wants the measure closer to their 2 percent inflation target.

"Clearly, much work remains to achieve the Fed's dual mandate of maximum sustainable employment in the context of price stability," New York Federal Reserve Bank President William Dudley told reporters.

High unemployment has led to sluggish income growth, which in turn has prompted households to tap savings and credit cards to fund their purchases.

Still, spending is unlikely to be a drag on growth, given that consumer sentiment is on the mend, as indicated by another report on Friday.

"Though the unemployment rate has improved, the jobs market remains a major challenge. Part of the decline in the unemployment rate is due to the fact that ... people have stopped looking for work," said Adolfo Laurenti, deputy chief economist at Mesirow Financial in Chicago.

"The high level of people out of the workforce and underemployed people show there isn't really much income generation to contribute to a better spending pattern."

A sustained growth pace of at least 3 percent would likely be needed to make noticeable headway in absorbing the unemployed and those who have given up the search for work.

Business spending grew at a sluggish 1.7 percent rate in the fourth quarter, pulling back sharply from the third-quarter's 15.7 percent pace.

Though exports held up, an increase in imports left a trade gap that chipped growth.

Unseasonably mild winter weather helped home construction post its fastest growth pace since the second quarter of 2010, with much of the increase going to meet rising demand for rental apartments.

Government spending shrank for a fifth consecutive quarter, reflecting a large decline in defense and still weak state and local government outlays. A bounceback could support growth at the start of the year.

Bureau Report




First Published: Friday, January 27, 2012, 22:52


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