Economic Growth Slows Sharply
The American economy grew at a mere 0.7% pace last fall, the Commerce Department said Thursday, as consumers slowed their spending amid renewed fears over job security, stock declines and the prospect of war with Iraq.
The economy’s weak performance from October to December brought to 2.4% the growth rate for 2002, according to Commerce. That’s an improvement on 2001’s 0.3% growth rate but nothing like the snapback that some economists had been forecasting.
Analysts found a glimmer of hope in the fact that business investment, which had tumbled for two straight years, increased in the latest quarter. But at a 1.5% pace, the rise was not enough to make up for nearly flat consumer spending.
The other area of strength: government spending, especially on defense, which rose at an 11.2% rate last quarter, up from 6.9% the previous quarter.
“We’re not growing at anywhere near what we need to bring this economy back to full health,” said Donald Straszheim, a Los Angeles economic consultant and former chief economist with brokerage giant Merrill Lynch & Co.
Slow growth translated directly into a weak job market. Wages and benefits increased at a 0.7% rate last quarter, the Bureau of Labor Statistics reported separately Thursday. That’s substantially less than analysts had predicted and the slowest rate of growth in three years.
The sluggishness was especially pronounced in private industry, which seems to be using troubled times to drive harder bargains with workers. Private-industry wages rose 2.7% last year, their slowest pace in a decade.
The latest sign of economic weakness ganged up with new White House warnings on Iraq and AOL Time Warner Inc.’s announcement of the largest annual loss in U.S. corporate history to send the stock market to three-month lows. The Standard & Poor’s 500 index dropped 19.75 points, or 2.3%, to close at 844.61. Other major indexes suffered similar declines.
Last fall’s rise in the gross domestic product, the sum of all goods and services produced in the U.S., was the slowest since the third quarter of 2001, when the country was emerging from a downturn. Although the economy has now grown for five consecutive quarters, the improvement has been so weak that many Americans think the nation still is in recession.
The slow pace of recovery is especially surprising because Washington has pulled out nearly all the stops to boost growth. The Federal Reserve has slashed interest rates to four-decade lows; the White House and Congress have poured hundreds of billions of dollars into the economy through tax cuts and new spending. President Bush recently proposed a 10-year, $674-billion package of mostly tax cuts in hopes of sparking revival.
There were some signs in the latest statistics of what analysts most fear: a sharp pullback by American consumers, whose expenditures especially on cars and houses have buoyed the economy. Consumer spending grew 1% in the final quarter of last year, down from a 4.2% pace in the previous quarter and its worst showing since 1993.
The slowdown in consumer spending -- and then some -- is accounted for by a swan dive in Americans’ purchase of durable goods, mostly cars. The Commerce Department reported that durable goods spending swung from rising at a 22.8% rate in the third quarter to falling at a 7.3% pace in the final quarter.
Some economists took heart from the fact, saying that last fall’s plunge in car buying was largely traceable to automakers’ ill-fated attempt to dispense with big discounts and no-interest financing.
“People wouldn’t go for it,” said David Littmann, chief economist with Detroit-based Comerica Bank. Auto sales revived after manufacturers restored the discounts, he said.
What analysts hope is that as consumers slow their purchases because of money or job concerns, American business will step in to replace them as the economy’s big spenders, keeping growth going and eventually sparking a pickup.
And there were at least tentative signs in the latest figures that something such as this may be underway. Although most of the increase in business investment was for equipment and software, the numbers suggest that firms may finally be getting over their fear of building plants. Although plant investment declined 9.3% last quarter, analysts said that was a big improvement on the 20% to 30% quarterly declines of the last year.
The improvement can’t come quickly enough for many Americans. The Labor Department reported Thursday that initial claims for unemployment benefits, which had fallen in recent weeks, rose 14,000 to 397,000.
Meanwhile, the volume of help-wanted advertising in major American newspapers fell to a four-decade low in December, according to a separate report by the Conference Board, a New York-based research group.
