Economy’s Growth Rate Cools Off to 4%

The U.S. economy grew at a weaker-than-expected 4% annual clip during the final three months of 2003, the government reported Friday, renewing concerns that business caution may slow the recovery and delay a snapback in hiring.

Growth of the gross domestic product, a measure of all goods and services produced in the United States, was impressive by historical standards. And news of it was accompanied Friday by new measures of consumer confidence and Chicago-area manufacturing that suggested the pace of economic activity had quickened this month.

But the 4% growth rate reported by the Commerce Department was less than half the blazing 8.2% rate for the July-to-September quarter and less than the 5% pace some economists had been predicting.

“What concerns me are the signs of how much business caution there still is,” said Peter E. Kretzmer, a senior economist with Bank of America Corp. in New York. “We may not have reached the high-momentum growth we thought we’d reached.”

Corporate America’s reluctance to begin investing in plants and equipments, building inventories and hiring in the wake of the 2001 recession was widely blamed for the slow and largely jobless recovery of the last two years. But starting last summer, it appeared that the corporate sector had finally found its economic footing and was ready to grow again.

The new growth figures were immediately caught in campaign-year political crossfire. President Bush, meeting with economists at the White House, asserted that the numbers show “the economy is strong and getting stronger.” He said that to sustain growth, Congress must make his tax cuts of the last three years permanent.

Rep. Pete Stark (D-Hayward) countered that recent growth had failed to produce jobs or substantial pay increases.

“People looking for work are saying, ‘Show me the jobs,’ and those lucky enough to have a job are saying, ‘Show me the money,’ ” Stark said.

Stocks fell and government bond prices rose on the news of the latest growth statistics.

For 2003 as a whole, gross domestic product grew 3.1%, compared with 2.2% in 2002 and only 0.5% in the recession year of 2001, the Commerce Department said.

GDP is expected to grow at a 4.4% annual pace during the first three months of this year, according to analysts surveyed by Blue Chip Economic Indicators.

The latest survey of consumer confidence, released Friday, shows Americans are growing more optimistic about the economy. The University of Michigan’s index of consumer sentiment rose to 103.8 from 92.6 in December. That was its highest level since November 2000, when Americans were still riding the wave of the 1990s boom.

Meanwhile, the National Assn. of Purchasing Management reported Friday that its Chicago factory index increased to its highest level in almost a decade, to 65.9 from 61.2. A reading above 50 means that manufacturing is growing.

The new GDP numbers showed business investment growing at a 6.9% annual rate during the October-to-December quarter, down from a 12.8% pace during the July-to-September quarter. Much of the growth was concentrated in computer and software investment, which rose at a 10% clip, down from 17.6% the previous quarter.

Still, some analysts expressed concern that businesses had not yet begun to make longer-term investments in such items as heavy equipment, and that they were not adding as much as expected to inventories. This suggests that businesses have doubts about the strength of the recovery, analysts said.

Inventories grew by $6.1 billion and accounted for 0.61 percentage point of the quarter’s 4% growth rate. That was an about-face from the previous quarter’s $9.1-billion decline, but not as big a turnaround as many had expected.

“What you need to see to have a self-sustaining recovery is that investment is broadening out and companies are creating jobs,” said John G. Lonski, chief economist with Moody’s Investors Service in New York. “You haven’t seen that so far.”

Labor Department figures released this month showed the economy created only 1,000 net new jobs in December, the last month for which figures were available. January’s jobs report, due out Friday, is expected to show a substantial pickup.

As business investment in the quarter grew with somewhat less-than-expected vigor, consumers also spent with less abandon than earlier in the year.

Consumer spending, which accounts for almost two-thirds of economic activity, rose at a 2.6% rate from October through December, down from 6.9% in the preceding three months and short of the 3% rate forecasters had predicted.

By far, the biggest slowdown came in consumer durables, such as cars, where spending rose at only about a 1% rate, far slower than the 28% pace during the summer and early fall.

Despite the slowdown of both investment and consumption growth, few analysts said they saw signs that the economic recovery was faltering. Some warned the problem may not be too little growth, but too much.

Federal Reserve policymakers hinted Wednesday that they might eventually seek to cool the pace of growth to protect against inflation. But Friday’s growth report may have pushed off the date when the U.S. central bank is likely to act.

An inflation measure that accompanied the new GDP numbers, and which is carefully watched by Federal Reserve Chairman Alan Greenspan, rose at only a 0.6% rate last quarter, down from a 1.8% pace the previous quarter.