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Growth Trails Forecasts as Americans Curb Spending: Economy

Growth Trails Forecasts as Americans Curb Spending
A shopper at Woodbury Common Premium Outlets center in Central Valley, New York. Photographer: Emile Wamsteker/Bloomberg

Restrained spending by consumers held growth in the U.S. economy to a 2.8% annual pace in the fourth quarter, slower than economists forecast while still the fastest pace in more than a year.

Gross domestic product, the value of all goods and services produced, climbed at a 2.8 percent annual pace following a 1.8 percent gain in the prior quarter, Commerce Department figures showed today in Washington. The median forecast of 79 economists surveyed by Bloomberg News called for a 3 percent increase. Growth excluding a jump in inventories was 0.8 percent.

Federal Reserve officials this week said they were concerned about the economy’s lack of vigor two years after the recession ended, prompting a pledge to keep interest rates low at least until late 2014. The biggest gain in GDP since the second quarter of 2010 shows that the world’s largest economy has so far withstood the effects of the debt crisis in Europe.

“We’re recovering, but it’s a very long, slow, drawn-out process,” said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts, who correctly forecast the fourth-quarter figure. “Relatively speaking, the U.S. is one of the few areas where we would expect to see growth in 2012 better than 2011.”

The Standard & Poor’s 500 Index fell 0.2 percent to 1,316.33 at the close of trading in New York. The yield on the five-year Treasury note fell two basis points to 0.75 percent after earlier dipping below 0.74 percent to a record low.

Survey of Economists

Projections in the Bloomberg survey ranged from 2.4 percent to 4.5 percent. For all of 2011, the world’s largest economy grew 1.7 percent, less than 3 percent a year earlier.

“Recovery is reasonably well established,” Larry Summers, a former director of the National Economic Council under President Barack Obama, said in an interview at the World Economic Forum’s annual meeting in Davos, Switzerland.

“Is escape velocity -- at a sufficient rate to get us back to full employment in a reasonable interval -- yet established?” he said. “I think one would have to say the answer to that question is ‘No.’”

A gain in consumer confidence reported today may help fuel further spending. The Thomson Reuters/University of Michigan final index of consumer sentiment climbed to 75 in January, the highest level in almost a year, from 69.9 at the end of December.

The U.S. is likely to outperform Europe and Japan this year, according to the International Monetary Fund. The IMF this week kept its U.S. forecast for 2012 unchanged at 1.8 percent. It predicted a 0.5 percent contraction in the 17-nation euro area and a 1.7 percent expansion in Japan.

Spain, Japan

Reports today from Spain and Japan underscored those forecasts. Spain’s unemployment rate rose to 22.9 percent, the highest in 15 years. Japan’s retail sales grew at the fastest pace in more than a year as consumer spending rebounded.

Treasury Secretary Timothy F. Geithner, speaking in Davos, said it’s “realistic” to expect the U.S. economy to grow about 2 percent to 3 percent, adding that “We still face tremendous challenges as a country.”

The White House used today’s GDP report to renew its call for an extension of the payroll tax cut to boost growth and put more Americans back to work.

“While the continued expansion is encouraging, faster growth is needed to replace the jobs lost in the recent downturn and to reduce long-term unemployment,” Alan Krueger, chairman of the White House Council of Economic Advisers, said in a statement.

Consumer Spending

U.S. consumer spending rose 2 percent in the fourth quarter, little changed from the 1.7 percent gain in the prior three months, today’s report showed. The median forecast of economists surveyed projected a 2.4 percent increase.

Spending rose 2.2 percent in 2011 after an increase of 2 percent in 2010, the weakest two-year performance of any expansion since World War II.

Americans dipped into savings to finance their purchases. The savings rate decreased to 3.7 percent, the lowest level since the last three months of 2007, from 3.9 percent in the third quarter.

“Final demand was pretty soft,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “The need for consumers to rebuild savings may be a headwind, but at the same time, we’re not seeing a collapse.”

After-tax income adjusted for inflation increased at a 0.8 percent annual rate in the final three months of 2011 after falling 1.9 percent in the prior period. It fell 0.1 percent over the past four quarters.

Losing Momentum

Spending at retailers lost momentum each month in the fourth quarter, slowing from a 0.7 percent gain in October to a 0.1 percent increase last month, according to previous Commerce Department reports. Merchants, including Macy’s Inc., Gap Inc. and Target Corp., cut prices to attract more business during the holiday shopping season.

Inflation took a smaller bite out of Americans’ wallets. A measure of prices tied to consumer spending advanced at a 0.7 percent pace last quarter, down from 2.3 percent in the prior period and the smallest gain in more than a year. That compares with the Fed’s long-run goal of 2 percent.

Government agencies struggled last quarter as they cut spending at a 4.6 percent annual rate, the fifth straight decline. For all of 2011, government spending dropped 2.1 percent, the biggest drop since 1971.

Stockpiles were rebuilt at a $56 billion annual pace, adding 1.9 percentage points to growth.

Business Investment

Business investment remained a bright spot. Corporate spending on equipment and software rose at a 5.2 percent annual rate last quarter. While down from the prior period’s 16 percent gain, recent reports indicate it will rebound early this year.

Orders for durable goods like computers and machinery climbed more than forecast in December, a Commerce Department report showed yesterday.

“For many products, demand has been above our ability to produce,” Mike DeWalt, director of investor relations at Caterpillar Inc., said on a conference call with analysts yesterday.

While the world’s biggest maker of construction and mining equipment has invested in factories to boost production, DeWalt said his company is, “still very tight on many products and are currently quoting extended delivery times for them.”

Homebuilding also picked up, adding to signs the industry is stabilizing. Construction of residential real estate climbed at an 11 percent annual rate, the best performance since the second quarter of 2010, when a government tax credit boosted demand. For all of 2011, the industry shrank 1.4 percent, the smallest decline since 2005, the last year homebuilding grew.

Benchmark Rate

Fed officials said this week their benchmark interest rate will stay low until at least late 2014 and they forecast unemployment, which registered 8.5 percent in December, will “decline only gradually.” The previously had vowed to keep rates low until at least the middle of 2013.

William C. Dudley, president of the Federal Reserve Bank of New York, said today that the fourth-quarter’s growth pace in the U.S. is unlikely to be sustained.

In a speech in New York, he cited “uncertainty as to how events in Europe will unfold,” as well as “more contractionary” fiscal policies and a “depressed housing market.”

John Olin, chief financial officer of Milwaukee-based Harley-Davidson Inc., said he was concerned about the outlook for sales in Europe. In the U.S., sales rose 12 percent in the quarter ended Dec. 31.

“We feel great about where we see retail sales in the U.S., but certainly remain cautious as we look forward, given the tentative nature of the overall economy and consumer confidence,” Olin said during a Jan. 24 conference call. “We are more concerned about retail sales in Europe, given the fact that they may already be in recession or may slip into recession.”

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