/ 30 January 2008

US economic growth weakest in five years

United States growth skidded lower in the fourth quarter and was the weakest in five years for all of 2007, according to a government report on Wednesday that highlighted the toll an enfeebled housing sector has taken on the national economy.

The Commerce Department said gross domestic product, which measures total goods and services output within US borders, edged up at a weaker-than-expected 0,6% annual rate in the fourth quarter and for the full year advanced only 2,2% — the slowest growth in annual GDP since 1,6% in 2002.

Analysts surveyed by Reuters had forecast that fourth-quarter GDP would grow at a 1,2% rate. The lacklustre fourth-quarter performance followed a booming third quarter when GDP surged at a 4,9% rate and is likely to fuel fears the economy is at risk of tumbling into recession in 2008.

The dollar’s value declined against other major currencies on the soft GDP data. US Treasury debt prices also fell but they were reacting to a private-sector group’s report implying that businesses were hiring more people in January than had been anticipated.

Spending on new-home building plunged by 23,9% in the fourth quarter, the biggest quarterly drop in 26 years, after falling by 20,5% in the third quarter. Over the course of the full year, residential spending fell by 16,9%, the worst annual performance since 1982.

There were also signs that prices were bubbling higher as a gauge favoured by the Federal Reserve — personal consumption spending excluding food and energy items — gained at a 2,7% annual rate in the fourth quarter. That was well ahead of the third quarter’s 2% increase and Wall Street expectations. It was the biggest increase for any three months in one-and-a-half years.

The Fed already has cut US interest rates by one-and-three-quarter percentage points since last fall and is expected to announce later on Wednesday that it is reducing them again, while the Bush administration is negotiating with Congress on a fiscal stimulus package to try to spur growth.

Kevin Flanagan, a strategist for Global Wealth Management with Morgan Stanley in New York, said the GDP figure is not promising for 2008. ”It does not provide a good launching pad for first-quarter GDP [for which] we would expect to see something in negative territory,” he said.

Separately, ADP Employer Services said on Wednesday that its surveys showed private employers added 130 000 jobs in January. The official Labour Department report on January employment is scheduled for release on Friday and economists surveyed by Reuters forecast it will show 63 000 new jobs.

One factor that slowed fourth-quarter GDP was the $3,4-billion annual rate of decrease in inventories, a turnaround from the third quarter when inventories were being built up at a $30,6-billion rate. When inventories are being drawn down, it subtracts from growth and the report showed more than a full percentage point growth was lost from this source in the fourth quarter.

Consumer spending, which fuels more than two-thirds of US growth, held up relatively well in the fourth quarter, growing at a 2% annual rate compared with 2,8% in the third quarter.

But growth in consumer spending for the full all of 2007 was the softest since 2003, a further indication that weakening housing prices and markets are putting a strain on household finances and confidence. — Reuters