U.S. economy rolling along at a 3.5% clip
New evidence arrived Wednesday that the American economy was heating up, thanks to confident consumers and improving housing and job markets. And workers are benefiting through higher wages.
The Commerce Department reported Wednesday morning that inflation-adjusted economic growth surged to 3.5% during the fourth quarter, up from 2% in the previous quarter and above average for an expansion.
Later in the day, the Federal Reserve left its benchmark short-term interest rate unchanged, while citing a stabilizing housing market, rebounding economy and tamer inflation.
The Fed statement, issued after President Bush delivered a bullish view in his State of the Economy speech in New York, sparked a rally on Wall Street. The Dow Jones industrial average climbed 98.38 points, its biggest rise so far this year, to close near its all-time high.
During the last few weeks, talk of a slowing economy and a weakening housing market has been replaced by new estimates reflecting a more-robust economy -- along with concerns that growth could lead to higher interest rates and resurgent inflation.
Workers’ average hourly earnings rose last month by the most since April, according to the Labor Department. Wage and salary costs to businesses increased 3.2% for the year, the Labor Department said Wednesday.
“Workers are making more money -- their paychecks are going further. Consumers are confident, investors are optimistic. The state of our economy is strong,” Bush said in a speech at New York City’s Federal Hall.
Evidence of how workers are feeling more confident: Consumer spending grew 4.4% during the fourth quarter, up from 2.8% in the third quarter and the strongest quarterly showing all year. The Conference Board reported Tuesday that its index of consumer confidence moved up to 110.3 in January from December’s revised 110 figure. Falling gasoline prices have boosted consumers’ buying power.
“We’re seeing the economy remain remarkably resilient in the face of a severe housing recession. Consumer spending more than offset the weakness in housing during the fourth quarter,” said Ed Yardeni of Yardeni Research Inc. in Great Neck, N.Y., calling the U.S. a “Garden of Eden for consumers.”
Lehman Bros. expects growth in consumer spending to slow to 2.6% this quarter, according to its New York-based economist, Drew Matus. But Matus conceded that Lehman Bros. also underestimated growth last quarter.
“We’ve underestimated the consumer for a few quarters in a row. And it seems the consumer is pretty confident,” Matus said.
Lorena Ortiz, 34, of Oakland epitomizes the more-ebullient American worker.
As a new junior analyst at Berkeley Policy Associates, an Oakland-based social policy research firm with 24 employees, Ortiz is earning $50,000, working full time and studying at night for her master’s in statistics at Cal State East Bay. Her roommate, a high school graduate with experience in bookkeeping, was just hired for a job that pays $15,000 more than she earned before. They both receive frequent calls from headhunters offering better-paying work.
“For being a single mom -- and I’m in school and I have a full-time job -- I feel really OK,” Ortiz said.
Ortiz expects to finish school in June, then receive a raise.
Berkeley Policy Associates also has been doing well. It landed several large contracts in recent months and plans to offer raises this year, said Frances Laskey, the company’s human resources director.
It also plans to hire two senior researchers, jobs that pay $70,000 to $90,000. And it’s not alone in the Bay Area or the state, said Laskey, president of the California Employer Advisory Council, which includes 49 employer groups statewide.
“Most of our competitors and collaborators are also ramping up,” Laskey said.
A survey this month by Small Business California, a business advocacy organization, showed that 60% of small-business owners consider the U.S. economy good or excellent, compared with 49% last year. That may be partly due to stabilizing costs. Benefit costs increased just 1.1% last quarter, and the total increase for the year was the smallest since 1999.
Roaring growth, combined with low national unemployment of 4.5% as of December, probably will lead to higher pay for many workers, Yardeni said. The Labor Department is due to issue its next jobs report Friday.
“Employers are going to start scrambling to hire folks because labor markets are getting tight,” he said. “If you want to expand your business, you can always do it to a certain extent through productivity, but you also need employees.”
Export growth also gave the economy a boost during the last quarter, as Bush noted during his New York speech before calling on Congress to renew his “fast track” authority to speed trade pacts through Congress without amendments. The authority expires July 1, and several Democratic leaders already have expressed opposition to reauthorization.
On Wednesday, Sen. Charles Schumer (D-N.Y.), chairman of the Joint Economic Committee, responded to Bush’s speech by conceding that the middle class was no longer “struggling to get by” but rather “struggling to get ahead.” He called for a “new vision” to help workers deal with economic challenges.
The economy grew 3.4% for all of 2006, compared with 3.2% the year before, the Commerce Department said.
In leaving its benchmark short-term interest rate unchanged at 5.25% on Wednesday for the fifth consecutive meeting, the Fed acknowledged “somewhat firmer economic growth, and some tentative signs of stabilization have appeared in the housing market.”
The central bank predicted the economy would continue expanding “at a moderate pace over coming quarters” but warned “some inflation risks remain” that could necessitate further rate hikes.
Most economists were revising growth estimates higher after Wednesday’s announcements. But many expect the Fed to leave rates unchanged all year.
“The wild card in all of this is housing,” said Matus, the Lehman economist.
Investment in home building during the fourth quarter fell 19.2%, the worst drop in 15 years, and reduced growth by 1.16 percentage points for the quarter. Matus said the Fed was likely to wait until after the spring home sales season, a good barometer of the housing market, before adjusting rates. Higher mortgage rates could kill any housing rebound.
A few analysts, including Barclays Capital’s Dean Maki, think rising wages could spur inflation, leading the Fed to raise rates later this year. Maki is predicting a quarter-point increase in June and two more during the year.
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molly.hennessy-fiske@latimes.com
