Year-End GDP Hints at Strong Recovery

The economy expanded at a 1.7% annual rate from October through December, the Commerce Department said Thursday, marking the fastest pace in a year and a prelude to first-quarter growth that may be the strongest since mid-2000.

Gross domestic product, the value of all goods and services produced, was driven in the final quarter of 2001 by consumer and military spending that surged after the terrorist attacks Sept. 11. Growth was stronger than the estimated 1.4% reported by the Commerce Department last month.

“The recession is over,” said William Sullivan, senior economist at Morgan Stanley Dean Witter & Co. in Jersey City, N.J. “This is paving the way for the economic rebound that’s taking place this quarter.”

The economy, which slipped into recession a year ago, is likely to grow at a 4.2% rate from January through March, according to a survey by Bloomberg News.

Businesses replenished stockpiles that had been drawn down at a record pace, consumers kept spending and manufacturers boosted production. A report Thursday showed Chicago-area manufacturing expanded in March for a second straight month, adding to evidence that the recession was the mildest since the end of World War II.

“I’m pretty optimistic and confident that we have turned around and the economy is going to be expanding,” Robert Parry, president of the Federal Reserve Bank of San Francisco, said. The recession probably ended in December, he said.

Interest-free financing and advertising that appealed to patriotism spurred auto sales in the fourth quarter, emptying dealer lots. That’s one reason BorgWarner Inc., the largest maker of parts for automatic transmissions, this week raised its first-quarter and 2002 profit estimates.

Confident consumers, whose purchases account for two-thirds of the economy, may still lead the economy. The University of Michigan’s consumer sentiment index rose to a 15-month high of 95.7 in March from 90.7 in February.

The recovery has not led to widespread job growth, a separate report showed. The number of U.S. workers filing first-time jobless claims rose by 18,000 last week to 394,000, the highest since mid-January, the Labor Department said.

Consumer spending grew at a 6.1% annual pace in the fourth quarter, the fastest since the second quarter of 1998, the GDP report showed.

The Commerce Department will probably report today that spending accelerated in February, growing 0.5% after rising 0.4% in January, analysts said.

The increases have benefited retailers such as Target Corp. and Best Buy Co. Target, the second-biggest U.S. discounter, reported that fourth-quarter profit rose 19% amid less price cutting. Best Buy, the largest U.S. retailer of electronics, said profit rose 80%, led by spending on digital televisions and DVDs.

Government spending rose at a 10.2% annual pace in the fourth quarter, the strongest since an 11.1% rate in the second quarter of 1978, as the U.S. increased outlays for its military campaign in Afghanistan and domestic security. Military spending increased at a 9% rate, the fastest in a year. Non-defense federal spending rose at 16%, the fastest in 11/2 years.

For the current quarter, the economy probably will expand at the fastest rate since the second quarter of 2000, according to the median of 50 forecasts in a Bloomberg survey conducted March 18-27. By the second quarter, growth is expected to slow to a 3% pace and probably will stay close to that rate through the end of the year.

That helps explain why businesses are in no hurry to hire more workers and why Federal Reserve policymakers may not be quick to raise their benchmark overnight bank lending rate from a 40-year low of 1.75%.

Also, the GDP price deflator, a gauge of inflation tied to the report, fell at a 0.1% annual rate in the fourth quarter.

“We can be deliberative as we approach this issue of when policy has to change and how aggressive it has to be,” the Fed’s Parry said. “I don’t think inflation shows, or indicates, that there is any imminent problem.”

Last quarter’s growth pace was the fastest since a 1.9% rate in the final three months of 2000. It followed a 1.3% pace of decline in the third quarter and a 0.3% rise in the second. The economy grew 1.2% in all of 2001, after increases of 4.1% in 2000 and 1999.

An index of manufacturing in the Chicago area rose to 55.7 in March after rising to 53.1 in February, to the National Assn. of Purchasing Management-Chicago said. It was the first consecutive increase since June and July 2000.