U.S. Economy Grew 2.8% in Fourth Quarter; Revised From 3.2%

By Bob Willis
(c) 2011 Bloomberg News
Friday, February 25, 2011; 9:45 AM

Feb. 25 (Bloomberg) -- The U.S. economy grew at a 2.8 percent annual rate in the fourth quarter, slower than previously calculated and less than forecast as state and local governments made deeper cuts in spending.

The revised increase in gross domestic product compares with a 3.2 percent estimate issued last month and a 2.6 percent gain in the third quarter, figures from the Commerce Department showed today in Washington. The economy, excluding inventories, grew at a 6.7 percent pace, the most since 1998.

Americans may be in a better position to keep spending after tax cuts put more money in their pockets, while companies such as Caterpillar Inc. benefit from faster economies overseas and business investment. A surge in oil prices sparked by turmoil in Africa and more cutbacks by state and local governments represent risks to growth.

"The economy underperformed expectations in the fourth quarter," said Ryan Sweet, a senior economist at Moody's Analytics Inc. in West Chester, Pennsylvania. Still, "if you factor in the rising gas prices, the economy is performing well. Consumers are taking the rise in gasoline prices in stride" so far, he said.

For all of 2010, the world's largest economy expanded 2.8 percent, the most in five years, after shrinking 2.6 percent in 2009. The volume of all goods and services produced rose to $13.37 trillion in the final three months of 2010.

Economists projected a 3.3 percent gain in fourth-quarter GDP, according to the median forecast in a Bloomberg News survey of 77 economists. Estimates ranged from 3 percent to 4.4 percent.

Stocks rose after the report, with the Standard & Poor's 500 Index gaining 0.6 percent to 1,313.87 at 9:36 a.m. in New York. Treasuries were little changed from yesterday, with the yield on the benchmark 10-year note at 3.45 percent.

State and local government expenditures fell at a 2.4 percent annual rate in the fourth quarter, compared with a previous estimate of a 0.9 percent drop. In the third quarter, state and local government spending rose 0.7 percent.

California should scale back pension promises to public workers and reshape the benefits system to make it similar to those used in industry to rein in costs, a state oversight panel recommended. Government pension costs are no longer sustainable, the independent Little Hoover Commission said yesterday.

The rising cost and underfunding of public employee pensions has sparked a national debate, most recently in Wisconsin where Republican Governor Scott Walker has asked the Legislature to boost contributions from state workers. California's 10 largest public pension funds were short a combined $240 billion in 2010, the commission found.

Household purchases, about 70 percent of the economy, rose at a 4.1 percent pace, the most since the same three months in 2006, compared with 4.4 percent originally estimated and a 2.4 percent rate in the third quarter.

The gain in consumer spending compared with a 4.2 percent median forecast in the Bloomberg survey and followed a 2.4 percent increase the prior quarter. Purchases added 2.9 percentage points to growth.

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