Growth Again, but Slower
Economy Gained at 4% Annual Rate in 4th Quarter
By Nell Henderson
Washington Post Staff Writer
Saturday, January 31, 2004; Page E01
The U.S. economy expanded at a healthy 4 percent annual rate in the final three months of last year, bolstered by rising consumer spending, exports and business purchases, the Commerce Department reported yesterday.
The fourth-quarter growth rate was encouraging, economists said, even though it marked a sharp slowdown from the torrid 8.2 percent annual rate clocked in the previous three-month period, when tax cuts and a wave of mortgage refinancings sent consumer spending soaring.
The numbers point to "the two best back-to-back quarters we've seen in the economy in a number of years," said Stuart G. Hoffman, chief economist with PNC Financial Services Group Inc.
For all of 2003, the nation's total output of goods and services, or inflation-adjusted gross domestic product, rose 3.1 percent. That was up from 2.2 percent the year before and from the meager 0.5 percent growth rate in 2001, when the economy was in recession, the Commerce Department said.
Voters rank the economy among their top concerns this presidential election year, polls show, and the White House cited the GDP report as evidence that President Bush's tax cut policies are working.
Bush said the report "indicates the economy is strong and getting stronger."
But Democratic critics were quick to counter that the president's policies have not boosted employment, leaving the nation with 2.3 million fewer payroll jobs than when Bush took office three years ago.
"Growth like this should be accompanied by rapid growth in jobs and wages, but neither has materialized this far into the recovery," said Rep. Fortney "Pete" Stark (D-Calif.), senior Democrat on the Joint Economic Committee.
Until recently, the nation's economic recovery was propelled primarily by consumers, who got three tax cuts in three years and enjoyed very low interest rates on loans for home, auto and other purchases. But consumers took a breather at year end, increasing their spending at a 2.6 percent annual rate in the fourth quarter, compared with 6.9 percent in the third quarter.
Meanwhile businesses, which had held back on spending for most of the recovery, increased their investment significantly in the second half of last year. Business spending on equipment and software rose at a 10 percent annual rate in the fourth quarter, a strong number even though it was slower than the rise in the third quarter, when such purchases rose at a 17.6 percent annual rate. Business spending on transportation equipment also increased.
Economists welcomed the jump in business spending, saying it will take both consumers and businesses to keep the recovery going.
"Now the economy has two engines, not just one," powering "more balanced, broadly based economic growth," said Sung Won Sohn, chief economic officer with Wells Fargo Economics.
But he cautioned that businesses have not started hiring enough new workers to ensure that consumer spending will continue to rise significantly. Although some slowdown in consumer spending was inevitable after the sizzling third quarter, Sohn said, the sharpness of the fourth quarter drop-off was worrisome. "Until and unless we create more jobs, consumer spending is going to slow again."
Analysts are forecasting the economy to grow by more than 4 percent this year, in part because last year's tax cut means many households will receive big tax refunds this spring and businesses have tax incentives to invest in certain kinds of equipment this year. On top of that, interest rates are likely to remain low.
The Federal Reserve decided Wednesday to leave its key short-term interest rate target at a 45-year low of 1 percent, saying it "believes it can be patient" in deciding when to raise rates. The Fed indicated it will hold interest rates down as long as the job market remains weak, businesses have plenty of excess capacity and inflation is "quite low."
One of the Fed's preferred measures of inflation fell in the fourth quarter, to a very low 0.7 percent annual rate from a 1 percent annual rate in the third quarter, the Commerce Department said. The measure, the core personal consumption expenditure index, excludes volatile food and energy prices. For all of 2003, the prices measured by the index rose 1.2 percent, compared with a 1.7 percent rise the year before.
The GDP report did not alter economists' predictions that the Fed will wait to raise rates until this summer at the earliest, and possibly until next year. Hoffman said of the Commerce Department report, "There is nothing in here that will try the Fed's patience."
The report showed that the booming housing market continued to boost the economy. Spending on home building and other residential investment rose at a 10.6 percent annual rate in the fourth quarter -- again, a very strong number but slower than the 21.9 percent rise in the third quarter.
Exports, aided by the falling dollar, surged at a 19.1 percent annual rate in the October-through-December period, almost twice as fast as the 9.9 percent rate of gain in the previous quarter. A lower dollar makes U.S. exports relatively cheaper on world markets.
However imports also rose at a 11.3 percent annual rate in the fourth quarter, much faster than the 0.8 percent rise in the third.
Federal defense spending added to growth by rising at a 1.8 percent annual rate in the final quarter, after falling by 1.3 percent in the prior three-month period.
The GDP numbers released yesterday are the Commerce Department's first estimate, based on incomplete data, and are subject to revision as more information becomes available.
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