Brisk 5.9 percent growth in Q4 will likely fade
The fresh reading on the nation's economic standing, released by the Commerce Department on Friday, was better than the government's initial estimate a month ago of 5.7 percent growth. It would mark the strongest showing in six years.
Even so, it didn't change the expectation of much slower economic activity in the current January-to-March quarter.
Adding to that picture was a separate report Friday that sales of previously occupied homes fell sharply in January for the second straight month, to their lowest point since summer. The results were far worse than forecast. They are another sign the housing market's recovery is faltering.
Roughly two-thirds of last quarter's GDP growth came from a burst of manufacturing — but not because consumer demand was especially strong. In fact, consumer spending weakened at the end of the year, even more than the government first thought.
Instead, factories were churning out goods for businesses that had let their stockpiles dwindle to save cash. If consumer spending remains lackluster as expected, that burst of manufacturing — and its contribution to economic activity — will fade.
The signs aren't hopeful. Consumer confidence took an unexpected dive in February. Unemployment stands at 9.7 percent. Home foreclosures are at record highs. And many Americans are still having trouble getting loans.
Forecasters at the National Association for Business Economics predict the economy will expand at only a 3 percent pace in the first quarter of this year. The next two quarters should log similar growth, they predict.
Unlike past rebounds driven by the spending of shoppers, this one is hinging more on spending by businesses and foreigners.
Stronger spending by businesses and foreigners contributed to the bump-up in economic growth in the fourth quarter. So did the fact that companies stopped slashing their stockpiles of goods. During the worst of the recession, companies cut inventories at record rates.
Businesses boosted spending on equipment and software at a sizzling 18.2 percent pace, the fastest in nine years. Foreigners snapped up U.S.-made goods and services, which propelled exports to grow at 22.4 pace, the most in 13 years.
And the slower drawdown in businesses' stockpiles accounted for nearly 4 percentage points of the fourth-quarter's overall growth, even more than the government first estimated.
Consumers, however, lost energy. They increased their spending at a pace of just 1.7 percent. That was weaker than first thought and down from a 2.8 percent growth rate in the third quarter.
Looking ahead, consumer spending is expected to aid the recovery — not lead it. That's one reason why the recovery is expected to move forward at only a moderate pace of around 3 percent in coming quarters.
In normal times, such growth would be considered respectable. But the nation is emerging from the worst recession since the 1930s. Sizzling growth in the 5 percent range would be needed for an entire year to drive down the unemployment rate, now 9.7 percent, by just 1 percentage point.
For all of this year, the economy is expected to grow 3.1 percent, according to the NABE forecasters. Though modest, that pace would mark a big improvement from 2009, when the economy contracted by 2.4 percent — the worst showing since 1946.
As government stimulus wanes and Federal Reserve economic-support programs end, the economy — especially the fragile housing market — could suffer. Economists say the odds of the economy sliding back into a recession this year are low, but they won't rule it out.
In appearances on Capitol Hill on Wednesday and Thursday, Federal Reserve Chairman Ben Bernanke said record-low interest rates are still needed to make sure the recovery becomes firmly rooted and to help ease high unemployment.
If gains from inventories and exports are taken out, the economy last quarter grew at just a 1.6 percent pace.
And, improvements in the housing market also tailed off at the end of last year — despite massive government support.
There's worry inside and outside the Fed about how housing will fare once a homebuyer tax credit ends in the spring and the Fed stops a mortgage-securities buying program that has lowered mortgage rates and boosted sales.