Economy speeds ahead in quarter
While the 5.7 percent rate was the best since 2003, spending on inventories overstated the good news.
WASHINGTON - The economy's faster-than-expected growth at the end of last year, fueled by companies boosting output to keep inventories up, is likely to weaken as consumers keep a lid on spending.
The 5.7 percent annual growth rate in the fourth quarter, reported yesterday by the Commerce Department, was the fastest pace since 2003. It marked two straight quarters of growth after four quarters of decline.
Growth exceeded expectations mainly because business spending on equipment and software jumped much more than forecast.
Still, economists expect growth to slow this year as companies finish restocking inventories and as government stimulus efforts fade.
The fourth-quarter rate "overstates the strength of the economy and won't be sustained," said Ryan Sweet, senior economist at Moody's Economy.com in West Chester. "Growth will slow to around 2 percent this quarter because of low [consumer] confidence, scant hiring, and less support from inventories."
That won't be fast enough to significantly reduce the unemployment rate, now 10 percent. Most analysts expect the jobless rate to keep rising for several months and remain close to 10 percent through the end of the year.
High unemployment and stagnant wage growth will likely keep consumers cautious about spending. Wages and benefits paid to U.S. workers posted a scant gain in the fourth quarter. And for all of last year, workers' compensation rose by the smallest amount on records going back about 25 years.
The economic recovery could falter if consumers, who account for 70 percent of economic activity, lack the income to ramp up spending.
"That's why there's so much hand-wringing right now," said Brian Bethune, chief U.S. financial economist for IHS Global Insight. "Can the economy really sustain this? That's the big question mark sitting out there."
Changes to inventories added 3.4 percentage points to the fourth-quarter growth, the Commerce Department said in its report.
Excluding inventories, the economy would have grown at a 2.2 percent clip, the government said. That is an improvement from 1.5 percent in the third quarter.
Consumer spending rose 2 percent, down from a 2.8 percent rise in the third quarter. It added 1.4 percentage points to GDP growth.
A steep increase in exports also helped boost growth last quarter. The shipment of goods overseas rose 18.1 percent, far outpacing a 10.5 percent rise in imports. Net exports added 0.5 percentage point to GDP.
A small increase in federal spending was outweighed by a drop in state and local spending.