Economic Growth Slows in 4th Quarter

U.S. economic growth, hobbled by lower demand for American goods and services overseas, sagged to an annual rate of 3.1% in the fourth quarter of last year, the government reported Friday.

It was the lowest growth rate since the first three months of 2003, the Commerce Department said. Growth in the third quarter was 4%.

For all of 2004, however, the department’s Bureau of Economic Analysis found that gross domestic product -- the broadest measure of the nation’s economic output -- grew by 4.4% after inflation. That was its highest rate since the 4.5% registered in 1999, shortly before the most recent recession.

Economists attributed the tail-off in the October-to-December period of 2004 to a 3.9% decline in exports, the sharpest drop in two years. Imports, meanwhile, grew by 9.1%, as the United States continued to suck in goods from around the world, particularly China and Japan.

“We’re back in a situation where everybody but the U.S. is enjoying export-led growth,” said Nariman Behravesh, chief economist with Global Insight, a Massachusetts-based consulting firm.

If exports in the final quarter of 2004 had merely held at their previous level, the U.S. economy would have grown a vigorous 4.8% in the last three months of the year, said Bill Dudley, chief domestic economist with Goldman Sachs & Co.

The worsening trade picture has developed despite a decline in the dollar, which has fallen by about 15% against the euro in the last three years.

A cheaper dollar would normally boost U.S. exports by cutting the price of U.S. goods and services on overseas markets. Conversely, it would raise the price of imports.

But Mark Zandi, chief economist at Economy.com, a Pennsylvania consulting firm, said it takes time for this effect to occur, while contracts for the delivery of goods at higher dollar values run their course.

And China, the source of much of the U.S. trade deficit, pegs the value of its currency to the dollar, which means the dollar does not fall in value against the yuan. That has been a source of considerable irritation among U.S. policymakers.

Treasury Secretary John W. Snow said the new economic data pointed up “the need for our trading partners to adopt policies that accelerate economic growth” at home so that their economies do not rely so heavily on exports to the United States. Snow will probably make that point when he meets in London on Friday with finance ministers and central bankers from the other six largest industrial nations.

The Commerce Department report showed that Americans continued their consumption habits in the final three months of last year. Overall sales in the U.S. grew by 4.7%.

But so much of what they bought came from abroad that the nation’s economic growth rate, at 3.1% after inflation, fell short of the 3.5% that had been the consensus forecast of Wall Street economists.

Much of the data that went into the Commerce Department’s “advance” estimate of economic growth -- the data released Friday -- covered only October and November.

Zandi said the most current information about the final quarter of 2004 arrived too late for inclusion in Friday’s report, but it suggested there would be upward revisions in the growth rate.

For all of 2004, economic growth fell 0.2 percentage point short of the assumption that the Bush administration will include in the fiscal 2006 budget that it plans to propose to Congress on Feb. 7. That could translate into less tax revenue -- and a higher deficit -- than the budget will forecast. But Maury Harris, chief U.S. economist at investment house UBS, predicted that a future Commerce Department revision would bring it into line with the administration’s forecast.

Still, the economic growth report contributed to sagging stock markets. The Dow Jones industrial average lost 40.20 points, Nasdaq was down 11.32 points and the Standard & Poor’s 500 index fell 3.19 points.

The Commerce Department report also included some positive news on the inflation front. The department’s index for prices paid by U.S. residents rose at an annual rate of 1.9% in the final quarter of 2004, barely more than the 1.7% increase registered in the previous three months.

Economists said the combination of growth and inflation would do nothing to change the course of the Federal Reserve, whose policy-making panel will meet next week to consider its sixth consecutive quarter-point increase in short-term interest rates.

The Fed had cut rates to 1% to help pull the economy out of its 2001 recession before beginning its campaign in June to increase them gradually. Its federal funds rate, which governs overnight loans to banks, now stands at 2.25%.

“The Fed will continue to push rates higher because they think rates are too low,” Zandi said. “They can continue to take that stimulus away in a slow and measured way.”

Personal income, propelled by a special dividend payment by Microsoft Corp. of about $30 billion, soared by 10.8% in the final three months of 2004, up from 3.4% in the previous three months.

In a separate report, the Labor Department said U.S. employment costs rose 0.7% in the final three months of 2004. Salaries and wages grew by 0.4%, the lowest since the first three months of 1999, but benefits rose by 1.4%.