Americans' Wallets Are Weakening

The American economy barely budged at the end of 2002, growing at an annual rate of just 0.7 percent in the final three months of the year, the Commerce Department reported Thursday.

The performance — weaker than the 0.9 percent increase analysts were predicting — gave the fourth quarter the distinction of being the worst quarter for gross domestic product in 2002.

It also marked the weakest showing since the economy actually shrank at a 0.3 percent rate in the third quarter of 2001 as the country was mired in its first recession in a decade.

There were warning signs that the one saving grace of the economy during the slowdown — individual consumer spending — might be weakening. The fall-off in growth was partly due to lower household purchases, which grew at their slowest rate in almost a decade.

In another report, the Labor Department said new claims for unemployment benefits increased last week for the second week in a row.

The meager rise in gross domestic product in the fourth quarter of 2002 came after the economy grew at a respectable 4 percent rate in the third quarter, the Commerce Department reported Thursday.

GDP measures the total value of goods and services produced within the United States and is considered the broadest barometer of the economy's health.

Although the economy ended 2002 on a sour note, for all of 2002 the economy grew by a decent 2.4 percent. While that marked a big improvement over the tiny 0.3 percent rise registered in 2001, it was still considered weaker-than-normal growth for the U.S. economy.

The economy, knocked down by a recession that began in March 2001, has been struggling to get back on sure footing. Economic growth has been uneven, with a quarter of strength, followed by a quarter of weakness.

Consumers have been virtually the sole source of support keeping the economy going.

But in the fourth quarter of 2002, they grew tired, and cut back on buying durable goods. Consumer spending, which accounts for two-thirds of all economic activity in the United States, grew up a rate of just 1 percent in the final quarter of last year. That was down from a brisk 4.2 percent growth rate in the third quarter and marked the worst showing since the first quarter of 1993.

Economists were predicting consumers would lose some of their appetite for spending in the face of worries about a possible war with Iraq, a lackluster job market and a turbulent stock market. A report this week said consumer confidence had fallen for the second month in a row.

Still, most economists believe consumers will keep their pocketbooks and wallets sufficiently open to prevent the economy from backsliding into a new recession.

For the economy to get back on sure footing, a sustained turnaround in business investment is necessary, economists say.

Businesses, worried about a war and other uncertainties, have been in no mood to go on hiring sprees or buying binges when it comes to capital investments in plant and equipment.

For the week ending Jan. 25, new jobless claims rose by a seasonally adjusted 14,000 to 383,000 — the highest level in a month. The increase came after a 20,000 surge, based on revised figures, during the preceding week.

The more stable, four-week moving average of new applications for benefits, which smoothes out week-to-week fluctuations, fell to 384,000, the lowest level since Nov. 30.

But there was some encouraging news in the fourth quarter on this front. After eight straight quarters of cutting capital spending, businesses boosted such investment at a 1.5 percent rate in the fourth quarter. That marked the best showing since the third quarter of 2000.

The Federal Reserve decided Wednesday to hold a key interest rate at a 41-year low of 1.25 percent, with the hope that will spur consumers and businesses to spend and invest more, bolstering economic growth.

The Fed has slashed interest rates a whopping 12 times, starting in January 2001, with the last rate reduction coming in November 2002, in a bid to energize the listless economy.

President Bush has proposed a $674 billion tax cut to stimulate the economy by eliminating taxes on stock dividend payments and accelerating the tax cuts passed in 2001. Democrats have a smaller plan calling for immediate tax rebates.

Both plans would increase the deficit, which some economists fear could push interest rates higher and choke off the recovery.