Wednesday, February 28, 2007


Economy Grows Slower Than Expected in 4Q

Economy Grows Slower Than Expected in 4Q
Wednesday February 28, 3:03 pm ET
By Jeannine Aversa, AP Economics Writer

Economy Grew at Slower Pace in Last Quarter of 2006; New Home Sales Plunge
WASHINGTON (AP) -- The economy turned in a much weaker performance in the final quarter of 2006 than initially thought, and new-home sales tumbled in January by the most in 13 years, suggesting more business lethargy ahead.

The latest batch of economic reports from the Commerce Department on Wednesday pointed to a temporary economic listlessness rather than signaling the economy would slip into recession, economists said.

Ken Mayland, president of ClearView Economics, called it a "midcourse breather."

The reports came a day after stocks at home and abroad took a nosedive as investors worried about the economic health of global powerhouses, the United States and China. Wall Street rebounded on Wednesday as Federal Reserve Chairman Ben Bernanke sought to calm investors' nerves and allay fears about a major economic slowdown. Bernanke said the Fed was looking for "moderate growth in the U.S. economy going forward."

The Dow Jones industrials, which had been up more than 130 points earlier in the day, finished the session with a gain of 52.39 points to 12,268.63.

The new reading on gross domestic product showed the economy grew at a 2.2 percent pace -- a considerably weaker rate than the government first estimated. It initially had reported the expansion in the last three months of 2006 to be at a 3.5 percent pace. The principal reason for the new, significantly lower estimate: Businesses tightened their belts amid fallout from the troubled housing and automative sectors.

Bernanke said he wasn't worried about the GDP's downward revision, saying the new reading "is actually more consistent with our overall view of the economy than were the original numbers."

The fresh look at the housing market was sobering. New-home sales plummeted by 16.6 percent in January from the previous month. That was the largest decline since January 1994, when sales slid by 23.8 percent.

The decline in January -- much steeper than analysts anticipated -- left sales at a seasonally adjusted annual rate of 937,000, the lowest level since February 2003.

As sales cooled, so did home prices.

The median sales price of a new home -- where half sell for more and half for less -- dropped to $239,800 in January, down 2.1 percent from the same month last year.

The new GDP figure for the October-to-December quarter was a tad slower than the 2.3 percent growth rate economists were forecasting and clearly less sunny than the original estimate. The GDP, which measures the value of all goods and services produced within the United States, is the best overall barometer of economic health.

Although the fourth quarter's showing marked a slight improvement from the third quarter's mediocre 2 percent growth rate, it didn't alter the overall picture that economic activity in both quarters was restrained by the housing slump and the ailing automotive sector.

Investment in home building in the fourth quarter was slashed by 19.1 percent on an annualized basis, the steepest decline in 15 years.

Business retrenchment was a key factor behind the lower GDP estimate for the fourth quarter. Businesses, worried that extra supplies of goods might get out of whack with customer demand, ended up investing much less in their inventories than previously thought. That shaved 1.35 percentage points off the fourth-quarter GDP, the most in 1 1/2 years.

Companies also ended up cutting back on other spending and investment in the fourth quarter, including equipment and software, new plants and other commercial buildings.

Consumers, a major force shaping overall economic activity, boosted spending at a 4.2 percent pace in the final quarter of last year. That was brisk -- and up considerably from a 2.8 percent pace in the prior quarter. But it also was slightly less than the 4.4 percent growth rate first estimated for the final quarter of last year. That also played a role in the GDP downgrade in the fourth quarter.

Such a big revision in fourth quarter GDP -- to a 2.2 percent pace from the initial 3.5 percent pace -- was unusual. The government said the average revision is much smaller -- 0.5 percentage point. "A revision of 1.3 percentage points or larger has occurred only seven times in 30 years," it said.

Analysts predict the economy will stay sluggish for a while, reflecting continued strain from the housing sector. The economy should clock in at a 2.5 percent pace in the current January-to-March quarter, edge up to a 2.6 percent pace in the April-to-June period, according to projections by the National Association for Business Economics.

Of the latest GDP figures: "Overall these data confirm a sustained downshift in growth," said Ian Shepherdson, chief economist at High Frequency Economics.

GDP and new-homes sales reports:

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