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Economy stuck in a rut in final quarter of 2005

The economy hit a soft patch in the final quarter of 2005, growing at an annual rate of just 1.7 percent. But fresher readings suggest America’s business health has improved and is generally sound.
/ Source: The Associated Press

The economy was lethargic in the final quarter of 2005, but fresher readings suggest a rebound since then.

Gross domestic product grew at an annual rate of just 1.7 percent in the October-to-December quarter, the Commerce Department reported Thursday. It was the most sluggish showing in three years but was a tad better than the 1.6 percent estimated a month ago.

The slight upgrade reflected stronger inventory building by businesses than previously thought.

Stephen Stanley, chief economist at RBS Greenwich Capital, summed up the fourth-quarter performance as “pretty dismal,” but he added: “Of course we, along with everyone else, look for a snapback” in the current January-to-March quarter.

The Federal Reserve is of the same mind.

Private analysts predict growth during this period will clock in at a brisk pace of 4.5 percent or higher. Then economic activity will moderate to around a 3.4 pace in the April-to-June 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.

In other economic news, the Labor Department said new claims filed last week for unemployment benefits dropped by 10,000, to 302,000, another sign the job picture is turning brighter.

Federal Reserve Chairman Ben Bernanke and his colleagues said this week that the economy has emerged from the doldrums and has “rebounded strongly” in the January-to-March quarter. “But (it) appears likely to moderate to a more sustainable pace,” the board said.

Fed policymakers chalked up the fourth-quarter’s mediocre performance to mostly “temporary or special factors” — an assessment that was shared by private economists who likened it to a temporary breather rather than a sign of troubles ahead.

The fourth quarter marked a big loss of momentum from the third quarter’s zippy 4.1 percent pace.

The slowdown was blamed on fallout from the Gulf Coast hurricanes and elevated energy prices.

Consumer spending grew at a pace of just 0.9 percent, the weakest since the first quarter of 1995. A cut in spending on big-ticket goods, such as cars, was the main culprit.

Cuts in spending by government also contributed to the fourth-quarter’s weak performance.

Overall business investment — which includes spending on residential and commercial projects and on equipment and software, however, grew at a speedy pace of 16.1 percent, the strongest since the second quarter of 2004.

An inflation gauge closely watched by the Federal Reserve showed that core prices — excluding food and energy — rose at a 2.4 percent pace in the fourth quarter. That was higher than the 2.1 percent previously reported and marked a substantial pickup from the third quarter’s 1.4 percent pace.

“The Fed will remain on inflation watch,” observed Joel Naroff, president of Naroff Economic Advisors.

To fend off inflation, Bernanke, at his first meeting as Fed chairman on Tuesday, boosted a key interest rate to 4.75 percent and hinted of further increases. In doing so, Bernanke and his colleagues hewed closely to the rate-raising script of predecessor Alan Greenspan.

Economists predict another rate increase will come at the Fed’s next meeting, May 10.

Fresher economic barometers, meanwhile, have flashed good signs for the economy.

The jobs market is improving, with companies adding a sizable 243,000 positions in February. The unemployment rate of 4.8 percent, meanwhile, is close to a 4½-year low reached in January.

Americans’ optimism in the economy rebounded in March, climbing to a nearly four-year high, the Conference Board reported Tuesday.

Thursday’s report also showed companies’ profit growth gaining ground in the fourth quarter of 2005. One measure of after-tax profits in the GDP report showed profits increased by 13.8 percent, a turnaround from the third quarter’s 4.3 percent decline.