WASHINGTON – The U.S. economy grew at a 0.1 per cent annual rate from October through December, the weakest performance in nearly two years. But economists believe a steady housing rebound, stronger hiring and solid spending by consumers and businesses are pushing economic growth higher in the current quarter.
The Commerce Department’s second estimate of fourth-quarter growth was only slightly better than its initial estimate that the economy shrank at a rate of 0.1 per cent. And it was well below the 3.1 per cent growth rate reported for the July-September quarter.
The revision to the gross domestic product was due to higher exports and more business investment. GDP is the broadest measure of the economy’s output.
Many economists say temporary factors that held back growth in the fourth quarter are probably fading and growth is likely picking up in the January-March quarter.
Paul Ashworth, chief U.S. economist at Capital Economics, predicts growth could be as high as 2 per cent in the current quarter despite higher Social Security taxes, which have reduced take-home pay for most Americans. Alan Levenson, chief economist for T. Rowe Price, said growth could be as high as 2.5 per cent.
Ashworth noted that a sharp decline in defence spending and slower business restocking subtracted 2.9 percentage points from growth in the fourth quarter. At the same time, consumer spending and business investment — two key drivers of growth — accelerated at the end of last year.
“We still believe that the fourth-quarter GDP figures were a lot better than the headline stagnation suggests,” said Ashworth.
The economy could continue to struggle if policymakers in Washington cannot reach agreements over the budget his month, including billions of dollars in spending cuts that are set to begin on Friday. And a spike in gas prices and higher taxes could hold back consumer spending.
Still, a raft of recent reports suggests that many aspects of the economy are improving.
The Labor Department said that the number of Americans seeking unemployment benefits fell 22,000 last week to a seasonally adjusted 344,000. The steep decline comes as hiring has strengthened, providing more income to consumers.
Employers have added an average of 200,000 jobs per month in the past three months. That’s up from an average of 150,000 in the previous three months.
More jobs and ultra-low mortgage rates are helping the once-battered housing market recover. New-home sales jumped 16 per cent to their highest level in 4 1/2 in January.
At the same time, the number of new homes available for sale remains near record lows. That means builders will likely have to start construction on more homes and apartments to keep up with demand. That should create more construction jobs.
Home prices also rose in December compared with the same month a year ago by the most in more than six years. Rising home values also contribute to the housing recovery and the broader economy. They encourage more people to buy before prices rise further. Higher prices also build homeowners’ wealth, which can spur more spending and economic growth.
Businesses and consumers are also showing greater confidence despite automatic spending cuts scheduled to take effect on Friday. A measure of consumer confidence rebounded in February after a sharp fall the previous month that likely was a result of the tax increase.
Companies, meanwhile, sharply increased orders in January for a category of long-lasting manufactured goods that reflect their investment plans. That suggests they are confident about their business prospects.