Economy Gained Strength In 2006

Growth Dispels Recession Fears

Washington Post Staff Writer
Thursday, February 1, 2007; Page A01

The U.S. economy turned in a surprisingly strong performance last year, new data show, growing 3.4 percent despite higher interest rates, high oil prices and the sharpest housing downturn in 15 years.

The report from the Commerce Department, showing that economic growth picked up in 2006 from the 3.2 percent growth of 2005, dispelled any lingering doubts about the momentum of the economy going into this year. Many economists predict growth will slow this year, but gone are the recession worries of last summer.

A team of workers spreads concrete for the basement floor of a new home in Erie, Colorado Monday, September 18, 2006. Builders probably started work last month on the fewest new houses in three years as higher mortgage rates discouraged home buyers, economists said ahead of a U.S. government report today. (Kevin Moloney/Bloomberg News.)

"Nothing, other than an external shock, will derail the economy this year," said Eugenio J. Alem?n, senior economist at Wells Fargo. "The economy's in good shape."

Unemployment and inflation fell last year while wages and salaries rose at their quickest pace in five years, according to a series of recent government reports. The reports suggest that troubles in housing and manufacturing, though painful for many people, have not caused the widespread economic damage that many experts had feared.

Federal Reserve policymakers held short-term interest rates steady yesterday, showing they are content -- at least for now -- with the state of the economy. They left their benchmark rate on overnight loans between banks unchanged at 5.25 percent, where it has been since June. But they indicated that they remain ready to raise borrowing costs if strong economic growth fuels a fresh bout of inflation.

President Bush hailed the news in a speech extolling the strong "state of the economy" on Wall Street, where he was also mobbed visiting the floor of the New York Stock Exchange. "As we begin this New Year, America's businesses and entrepreneurs are creating new jobs every day," he said. "Workers are making more money; their paychecks are going further. Consumers are confident, investors are optimistic."

The bright picture contrasts with the outlook of last summer, when home sales were plummeting and oil was hitting $77 a barrel. Many analysts predicted that consumer spending would stall because of costly gasoline, rising unemployment, and stagnant or falling home prices.

But the economy's buoyancy reflects two little-appreciated facts. First, the economy is less vulnerable to high oil prices than in the past, for several reasons, including improved efficiency.

Second, while the housing boom did give the economy a boost, the housing bust has not damaged the rapidly growing service industries, which employ about 80 percent of U.S. workers. And those jobs fuel consumer spending, which accounts for 70 percent of economic activity.

"This is not your grandfather's economy," said Richard Yamarone, director of economic research at Argus Research. "This is not a smokestack economy. . . . The consumer is the ultimate driver of the economy."

Economic growth did slow sharply in the spring and summer from a torrid 5.6 percent annual rate in the first three months of the year to a 2.6 percent pace in the second quarter and then 2 percent in the third quarter.

Much of the decline was accounted for by home building, which fell at a 19 percent annual rate in both the third and fourth quarters.

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