The economy grew at a healthy 4 percent clip in the fourth quarter, a sharp slowdown from the sizzling 8.2 percent third-quarter pace but still strong enough to support projections for a sustained, broad expansion with minimal inflation.
While a slowdown was expected after quarterly growth that was the strongest in 19 years, the preliminary assessment of the gross domestic product was slightly lower than the 4.8 percent rate projected by analysts. And there was nothing in the report to suggest the Federal Reserve will need to raise interest rates anytime soon, as many traders and investors have feared since the central bank modified the wording of its policy statement Wednesday.
Consumer spending growth slowed sharply in the quarter, and a related measure of inflation, which is closely watched by the Fed, showed that prices rose at a 0.6 percent rate in the fourth quarter, down from 1.8 percent in the third.
"Today's GDP report, if anything, postpones the day of reckoning," Wells Fargo chief economist Sung Won Sohn said. "Economic growth is slowing in part because of lack of job growth. ... The inflation picture is approaching zero rather than accelerating."
The Fed sent financial markets into a tizzy Wednesday with its surprise decision to eliminate from its formal policy statement a phrase promising it would keep interest rates low "for a considerable period." Instead the Fed said its policy-makers "can be patient" about raising rates, taking what one analyst called "a baby step" toward tightening.
While the GDP report showed a slowdown in growth, most analysts said the economy still has enough momentum to grow by 4.5 percent this year, up from 3.1 percent last year and 2.2 percent in 2002.
"As far as the economy fizzling out and running out of steam soon, I don't think that will happen," said Bill Cheney, chief economist at John Hancock Financial Services. He and others noted that the tax-cut package passed last year will continue to provide a sizable boost to growth in the first half of 2004 as taxpayers enjoy refunds that are bigger than expected.
"In important respects, recovery appears to be entering a sweet spot of solid growth, low inflation and relatively buoyant financial markets," Citigroup chief U.S. economist Robert DiClemente said in a weekly note.
The biggest debate among economists is when and whether the economy will generate enough jobs to take the slack out of the economy and force the central bank to begin tightening the spigot on credit.
In December the economy added a scant 1,000 jobs, compared with the 150,000 many forecasters expected, so analysts are hoping for a turnaround when the monthly payroll figures, including a major revision, are released Feb. 6.
"I think (the economy) has been given enough gas to get started and accelerate and create jobs," Cheney said. "The problem is I've thought that for most of the past year."
While the GDP numbers were a mild disappointment, other, more current figures offered a more upbeat perspective. A report from Chicago-area manufacturers, offering an early read on business sentiment in January, rose to its highest level in nearly a decade, much stronger than expected. A similar gauge for the New York metropolitan area also rose sharply.
And consumer sentiment rose in January to its highest level since November 2000, according to a University of Michigan survey that echoed other measures of confidence.
The GDP report showed that consumer spending, which accounts for more than two-thirds of economic activity, grew at a modest 2.6 percent rate in the quarter, down from the outsized 6.9 percent in the third quarter, when pocketbooks were fattened by a round of federal tax cuts and a wave of mortgage refinancing.
But spending on business equipment, which plummeted during the economic downturn that began in 2001, rose at a solid 10 percent rate in the quarter — down from 17.6 percent in the third quarter, but still an indication that the expansion is becoming more balanced, said Sohn of Wells Fargo.
"Businesses are gradually regaining confidence," he said. Growing demand should eventually lead to "significant employment gains" — the long-awaited missing piece of the slow-motion expansion.
Although the economy grew at a 6.1 percent rate in the second half of the year — the strongest half-year since 1984 — the economy added only 278,000 jobs from August through December. That is far less than the 150,000 a month needed just to keep pace with growth in the labor force, although a welcome improvement from the previous 30 months when the economy shed 2.3 million jobs, sending the unemployment rate to a nine-year high of 6.4 percent.
Many economists believe the payroll figures understate job growth suggested by other data, including a decline in the unemployment rate and in new claims for unemployment benefits. But unless the economy shows job growth by the traditional measure of company payrolls, President Bush could be vulnerable on the issue in his re-election bid this year.
After meeting with private economists at the White House Friday, President Bush said he was optimistic about the future.
"Today, we received news that indicates that the economy is strong and getting stronger," he said, referring to the GDP report.
But economists and policy-makers would like to see much better job growth, preferably beginning with the Feb. 6 report, to ensure that the economy is staying on track for a sustainable recovery even after the stimulus of tax cuts and low interest rates fades.