Growth in 4th Quarter Reached a 3-Year Low

By Nell Henderson
Washington Post Staff Writer
Saturday, January 28, 2006

The U.S. economy slowed sharply in the last three months of 2005 to the weakest pace in three years, as consumers, businesses and government all pulled back on spending, the Commerce Department reported yesterday, raising concerns about the strength of the expansion this election year.

The nation's gross domestic product, or output of all goods and services, rose at just a 1.1 percent annual rate in the fourth quarter, down from a 4.1 percent pace in the third quarter, the department said.

For the year, the economy grew 3.5 percent, a healthy rate but a slowdown from the 4.2 percent expansion of 2004, the department said.

The loss of momentum in the fourth quarter resulted from some temporary factors, such as the impact of Hurricane Katrina and Hurricane Rita, which triggered a spike in energy prices, several analysts said. The analysts said, however, that they expect the economy to rebound and expand by about 3.5 percent again this year.

The recent retrenchment by consumers also reflected several stresses that may weigh on the economy in the months ahead, others said, pointing to record levels of household debt, low savings and weak wage growth at a time of rising interest rates and a cooling housing market.

"I think it's the beginning of a prolonged slowdown, but not a recession," Richard Yamarone, director of economic research at Argus Research Corp., said of the economy's fourth-quarter performance.

The Bush administration, which has praised the economy's strength in recent weeks, was more upbeat. "The American economy is on a good course," Treasury Secretary John W. Snow said in a statement.

The economy's health could become an issue in elections this year for all U.S. House seats, a third of U.S. Senate seats and many state government offices.

Stock prices rose yesterday as many investors concluded that the soft GDP report might persuade Federal Reserve officials to stop raising interest rates after Tuesday, when they are likely to lift their benchmark short-term rate to 4.5 percent from 4.25 percent to keep inflation contained. That would mark the 14th consecutive quarter-percentage-point increase since June 2004, when the rate was 1 percent.

But the GDP report also showed that inflation accelerated at the end of last year. Consumer prices, excluding food and energy items, rose at a 2.2 percent annual rate in the last quarter, up from a 1.4 percent pace in the third quarter, according to a Commerce Department measure preferred by the Fed.

Many Fed policymakers have said they want to keep the inflation rate at 1 to 2 percent. So has White House economist Ben S. Bernanke, who is expected to be confirmed Tuesday by the Senate to become Fed chairman on Wednesday, succeeding Alan Greenspan.

Fed policymakers have not decided whether they will lift the benchmark rate higher after Tuesday's meeting, saying that decision will depend on inflation pressures in the months ahead. Many analysts predict the Fed will raise the benchmark rate at least once more, to 4.75 percent on March 28, which would probably be Bernanke's first policymaking meeting as chairman.

"If we get a good first quarter, they'll keep going," said Ethan S. Harris, chief U.S. economist at Lehman Brothers Inc., who believes the economy is off to a good start this year.

Factory orders and auto sales have picked up recently, while oil prices have ebbed from their highs in September after the hurricanes. And the government, insurance companies and businesses are likely to pour billions of dollars into reconstruction along the Gulf Coast this year, helping stimulate economic growth.

But, Harris added, "I think the real slowdown in the economy comes later this year" as a more sluggish housing market reduces some of the fuel that has powered consumer spending in recent years.

Housing was already losing steam by late last year. Housing investment rose at a 3.5 percent annual rate in the fourth quarter after climbing at a 7.3 percent pace in the third quarter, said Commerce, which adjusts the data for inflation.

Consumer spending, which accounts for two-thirds of U.S. economic activity, rose at a 1.1 percent annual rate in the last three months of 2005, down from a 4.1 percent rate in the third quarter.

Americans' after-tax personal income, adjusted for inflation, rose just 1.4 percent last year, the GDP report showed. And consumers spent more than their after-tax income last year, which means the nation had a negative personal saving rate for the first year since 1933, during the Great Depression. Households can spend more than their incomes by borrowing, dipping into savings or selling homes, stocks or other assets.

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