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U.S. economic growth revised higher

The economy, sagging under the strain of lofty energy prices, grew at an annual rate of 1.6 percent in the final quarter of last year — a mediocre performance that nonetheless turned out to be slightly better than first thought.
/ Source: The Associated Press

The economy, sagging under the strain of lofty energy prices, grew at an annual rate of 1.6 percent in the final quarter of last year — a mediocre performance that nonetheless turned out to be slightly better than first thought.

The new reading on gross domestic product, released by the Commerce Department on Tuesday, did represent an upgrade from the 1.1 percent growth rate initially estimated for the October-to-December quarter. Still, economic growth under the new GDP figure — as well as the old one — was the slowest in three years and clearly showed a loss of momentum from the third quarter’s brisk 4.1 percent pace.

Economists, however, said the economy is already rebounding smartly from the end-of-year lull. They predict growth will clock in at a robust 4.5 percent pace in the current January-to-March quarter.

Gross domestic product measures the value of all goods and services produced within the United States and is considered the best gauge of the economy’s performance.

The fourth quarter’s slowdown was blamed on the lingering fallout of the Gulf Coast hurricanes and elevated energy prices, which caused consumers especially to tighten their belts. Analysts said the final quarter’s performance was more like the economy hitting a pot hole on the road of expansion, rather than a sign of a more serious derailment.

Indeed, other recent economic barometers — including production, retail sales and jobs — suggested the economy did start bouncing back at the beginning of this year. The nation’s unemployment rate dropped to 4.7 percent in January, the lowest in 4 ½ years.

But that hasn’t helped President Bush’s standing with the public. Both the president’s overall job approval rating and his marks for handling the economy are mired near their lowest levels, according to an AP-Ipsos poll released earlier this month.

Looking at the final quarter of last year, the upwardly revised GDP figure matched economists’ expectations.

Businesses investment in equipment and software, export growth and inventory building by companies all turned out to be a better than first estimated, thus leading to the higher reading on GDP in the final quarter of 2005. Less deep cuts in government spending also contributed to the upgraded GDP reading.

In the fourth quarter, business spending on equipment and software grew at a rate of 6.2 percent. That was much better than the 3.5 percent pace first estimated for the period but did mark a slowing from the robust 10.6 percent growth rate registered in the third quarter.

Businesses also added to their inventories a bit more in the fourth quarter than previously thought, contributing to the upward revision to overall GDP. Inventory investment added 1.62 percentage points to GDP in the final quarter.

Export growth was a bit better in the fourth quarter, but imports grew more quickly leading to a trade deficit.

Consumer spending — usually a main force of economic activity — rose at a rate of just 1.2 percent in the final quarter of 2005, slightly better than a 1.1 percent growth rate first estimated but a big pullback from the brisk 4.1 percent pace logged in the third quarter.

The federal government actually cut spending in the final quarter at a 2.6 percent rate. That wasn’t as deep, however, as the 7 percent rate of decline first reported. In the third quarter, federal spending rose at a 7.4 percent rate.

Analysts, skeptical of the cut in federal spending in the final quarter given the costs of the war in Iraq and rebuilding from the Gulf Coast hurricanes, believed this was already being reversed in the current quarter.

To keep both the economy and inflation on an even keel, the Federal Reserve — under former chairman Alan Greenspan — has been boosting interest rates for nearly two years. New Fed chief Ben Bernanke is expected to raise rates again on March 27-28 — the first interest-rate meeting presided over by Bernanke.

An inflation measure closely watched by the Fed showed that core prices — excluding food and energy — rose at a 2.1 percent rate in the fourth quarter. That was slightly better than the 2.2 percent pace first reported for the period but represents a sizable inflation pickup from the third quarter’s rather tame 1.4 percent rise in core prices. The core reading suggested that energy price increases are filtering into the prices of other goods and services.