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U.S. Economy Downshifts

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CBS/AP
The economy grew at a 4 percent annual rate in the final three months of 2003 — a slowdown from the red-hot performance of the prior quarter but still compelling evidence of a recovery in full motion at year's end.

The reading on the gross domestic product for the October-to-December quarter, reported Friday by the Commerce Department, came after the economy grew at a sizzling 8.2 percent rate in the third quarter. That had been the strongest performance in nearly two decades.

Analysts were predicting a slowdown in economic growth in the fourth quarter as the stimulative impact of tax cuts and a refinancing frenzy — which propelled the economy during the summer — faded with the onset of winter.

The 4 percent growth rate for GDP, however, was weaker than the 4.8 percent pace that analysts had been forecasting. The GDP measures the value of all goods and services produced within the United States and is considered the broadest measure of the economy's health.

For all of 2003, the economy grew by a solid 3.1 percent. That marked an improvement over the 2.2 percent increase registered in 2002 and represented the strongest showing since 2000.

For out of work Americans, though, it may not feel like better economic times.

Job growth has been slow. The nation's payrolls grew by a scant 1,000 jobs in December, disappointing economists and frustrating jobseekers.

The economy has lost 2.3 million jobs since President Bush took office in January 2001. The president believes a stronger economy will lead to more jobs. Democrats point to the job losses as evidence of what they say are the president's failed economic policies.

Analysts are hopeful that stronger job growth will take place later this year as businesses feel more confident in the economy and see their bottom lines improve.

In a statement following their meeting this week, the Federal Reserve's rate-setting Open Market Committee said evidence shows that "output is expanding briskly.

"Although new hiring remains subdued, other indicators suggest an improvement in the labor market. Increases in core consumer prices are muted and expected to remain low," the statement continued, adding, "the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal."

In the fourth quarter, businesses increased investment in equipment and software at a brisk 10 percent rate — a positive development — even though that was down from a 17.6 percent growth rate in the third quarter.

And, in another encouraging sign, businesses boosted inventories, which they had been keeping lean, in the fourth quarter. That added 0.61 percentage point to the GDP last quarter, a turnaround from the 0.13 percentage-point reduction to GDP seen in the third quarter.

Businesses, however, trimmed spending on new plants and other buildings at a 3 percent rate in the fourth quarter, deeper than the 1.8 percent rate of decline seen in the third quarter. Economists say that a sustained turnaround in capital investment is a necessary ingredient for the recovery to be lasting.

Consumers, meanwhile, spent less vigorously in the fourth quarter, helping to subdue economic growth. They're spending went up at a 2.6 percent rate — the smallest increase in a year — and down from a brisk 6.9 percent pace registered in the third quarter.

Consumers showed less of an appetite to spend on big-ticket items, such as cars in the fourth quarter — after spending lavishly on such "durable goods" in the previous quarter.

Consumers' spending in the third quarter was supported by the extra cash from the president's third round of tax cuts and from a refinancing boom — that has since cooled.

Spending on home building and other residential projects rose at 10.6 percent rate in the fourth quarter. While that was down from a whopping 21.9 percent growth rate in the third quarter, it nevertheless underscored the important support role the housing market has played in the economic recovery.

Also adding to GDP last quarter: government spending on national defense rose at a 1.8 percent rate. That contrasted with a 1.3 percent rate of decline in the third quarter.

Some observers have worried that the recovery is being fueled largely by borrowing — deficit spending by the government and debt accumulation by consumers — that will have to be repaid later on.