WASHINGTON — The lower-than-expected annualized growth rate of 2.8 percent reported Friday for the final three months of 2011 raises doubts about the strength of the U.S. recovery and concerns that 2012 may be another year of muddling along.
Most mainstream economists had expected the fourth-quarter number to come in at 3 percent or higher, and the lower final number from the Commerce Department meant that the U.S. economy grew at an annual rate of 1.7 percent for all of last year. That’s below 2010’s growth rate of 3 percent for the nation’s gross domestic product, the sum of goods and served produced in the U.S. economy. It points to a tepid recovery after the deepest downturn since the Great Depression.
“I had hoped for a better GDP number, but I’m not worried. Cutting through all the crosscurrents in the data the economy is growing near 2.5 percent. This is just enough growth to create enough jobs to maintain at least a stable unemployment rate,” said Mark Zandi, the chief economist for forecaster Moody’s Analytics. “The economy re-accelerated at the end of last year and has started 2012 with a bit of momentum, given the improvement in the job market.”
The White House put a positive spin on the number, noting that it marked the 10th consecutive quarter of GDP growth, lifting the nation’s economy above where it stood in the final three months of 2007, the start of what's now called the Great Recession.
“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, the head of the White House Council of Economic Advisers, said in his blog after the GDP numbers were released.
One reason for the White House’s optimism is that perceptions about the economy seem to be turning more positive. Shortly after the GDP numbers disappointed, the University of Michigan-Reuters index of consumer sentiment was reported, and it came in slightly higher than consensus expectations. It was the latest in a string of positive indicators, including stronger employment numbers and solid manufacturing data.
More encouraging was the survey’s index of current conditions. It gauges how Americans feel about their own financial conditions and whether they think it’s a good time to buy pricey items such as cars and big appliances. That index rose sharply from the previous month and stands near a one-year high.
Taken as a whole, however, quarterly growth rates continue to be far smaller than they've been when coming out of past recessions and there are few signs of the economy roaring back into high gear.
“The fourth-quarter GDP data doesn't show the recovery ‘taking off.’ It's consistent with continued but gradual improvement,” Nigel Gault, the chief U.S. economist for forecaster IHS Global Insight, said in a note to investors.
Details in Friday’s numbers were the reason for the subdued outlook. Growth in the final months of 2011 was powered in large measure by a sharp rise in business inventories — $56 billion — as firms added stock or replenished existing stocks. Much of this was in the auto sector, which has been a positive surprise in a struggling economy.
That sharp growth in business inventories is not guaranteed to be repeated in the first months of this year, and other economic indicators were relatively flat at year’s end. For example, business fixed investment expanded by just 1.7 percent, with spending on equipment up nicely at 5.2 percent but offset by a 7.2 percent decrease in investment on business structures.
The 4.6 percent drop in government spending, fueled largely by a 12.5 percent decline in defense spending, dragged heavily against growth. Combined with a continued slide in government employment, on the state and federal level, a deficit-driven government economic retreat is slowing the broader growth rate.
“If the country was not going through a period of ‘fiscal austerity,’ GDP growth (for all of 2011) would have been closer to 2.2 percent. The contraction in government spending will continue in the year ahead and into 2013,” Kevin Logan, the chief U.S. economist for HSBC Securities in New York, wrote in an analysis of Friday’s numbers.
Chad Moutray, the chief economist for the National Association of Manufacturers, said his members were optimistic about continued growth but worried about the government retreat.
The “government sector — which is already providing a drag — will continue to dampen GDP, especially as more austerity measures (including defense and other nondiscretionary spending cuts) start to have real effects on the manufacturing community,” he wrote in his blog Shopfloor.org.
Consumer spending, so vital to U.S. economic expansion, was a mixed bag in the final months of last year. It rose by 2 percent, above the 1.7 growth in the third quarter. But it came in well below the 2.4 percent growth that mainstream economists had expected.
The quarterly GDP numbers are subject to revision as more data comes in to the Bureau of Economic Analysis. Some economists think it likely that the fourth-quarter GDP could be revised upward during the next scheduled reporting period, on Feb. 29.
“With nominal retail sales up 7.9 percent at an annual rate in the fourth quarter, we are not buying that nominal spending growth was as weak as suggested by this report and we continue to argue that initial readings on GDP can provide a very misleading representation of trends in the economy,” wrote economists at forecaster RDQ Economics in New York, who are bullish for the new year. “That said, we continue to look for 3 percent economic growth in 2012.”
Most economists are projecting growth in the 2 percent to 2.5 percent range for this year, fearing that debt problems in Europe and a nasty presidential election are likely to create a cloud of doubt over the U.S. economy.
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