U.S. Economy Grew 2.8% in Fourth Quarter, Revised From 3.2%
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.
The Federal Reserve’s preferred price gauge, which is tied to consumer spending and strips out food and energy costs, climbed at a 0.5 percent annual pace. The Fed’s longer term projection for inflation is a range of 1.6 percent to 2 percent. Rising oil and food costs may push up the prices of other goods and services.
Oil that topped $100 a barrel this week threatens to restrain consumer spending at the same time unemployment stands at 9 percent. For each sustained 10 percent gain in oil prices, economic growth may be reduced by an average 0.2 percentage point in the subsequent year, Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York, wrote in a note to clients yesterday.
A 14 percent gain in the Standard & Poor’s 500 Index since Sept. 30, reduced debt and gradual improvement in the labor market are giving consumers the wherewithal to spend.
Saks Inc., the New York-based luxury retail chain, yesterday reported its first fourth-quarter profit in three years as improved consumer confidence prompted customers to splurge on apparel and handbags again during the holiday season. Saks forecast a mid-single digit increase in percentage terms in sales at stores open at least a year in 2011.
In addition to consumer spending, fourth-quarter growth got a lift from a narrowing trade deficit as exports climbed, which added 3.4 points to growth, the most since 1980.
Caterpillar, the world’s largest maker of construction equipment, is projecting 2011 sales will top $50 billion after $42.6 billion last year.
“Sales are improving in every region, and are at or near records in the developing world,” Mike DeWalt, director of investor relations at Caterpillar, said on a Jan. 27 teleconference. “We’ve become somewhat more positive about economic growth in the developed economies of North America, Europe, and Japan.”
Spending on equipment and software grew at a revised 5.5 percent pace, compared with 15.4 percent in the prior quarter.
Slower inventory accumulation shaved 3.7 points from growth, the most since 1988. Inventories last quarter were stocked at a $7.1 billion pace, compared with an originally reported $7.2 billion rate and down from a $121.4 billion rate in the third quarter. Leaner stockpiles may help set the stage for faster growth in the first half of this year.
Wages and Salaries
Today’s report also showed that in the third quarter, wages and salaries increased by a revised $54.9 billion from the previous three months, compared with $52 billion initially reported. The figures incorporate new, more comprehensive data from tax records and may help support the biggest part of the economy in coming months. Pay rose by $53.4 amount in the fourth quarter, today’s report said.
As spending picks up, companies like Motorola Solutions Inc. and Intel Corp. are planning on adding workers.
“I do think we’ll expand, I think it’ll be more surgical and incremental,” Gregory Brown , chief executive officer of Motorola Solutions Inc., said in a Feb. 18 interview at a Business Council meeting in Fort Lauderdale, Florida. “There’ll be opportunities for hiring, but I would characterize it as relatively modest going forward.”
Intel, the world’s largest chipmaker, last week announced plans to build a $5 billion microprocessor plant in Chandler, Arizona, and hire 4,000 U.S. employees this year.
The government’s extension in December of President George W. Bush’s tax cuts, renewal of emergency jobless benefits for the long-term unemployed and cuts to payroll taxes of 2 percentage points prompted economists such as Hatzius at Goldman Sachs to raise forecasts for 2011.
The measures also let firms depreciate 100 percent of capital expenditures over the course of 2011. That will help sustain demand for equipment, which together with growing exports to China, Brazil and other fast-growing countries, has fueled the factory-led recovery that began in June 2009.
Today’s GDP estimate is the second of three for the quarter, with the other release scheduled in March when more information becomes available.
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