Economy Ended 2006 on a Strong Note
The U.S. economy shifted back into high gear during the last three months of 2006 as big-spending consumers offset weakness in the automobile and housing industries. The nation's gross domestic product grew 3.5 percent after inflation from October through December, according to a preliminary report released this morning by the Commerce Department. "This was a strong number," says Joel Prakken, chairman of Macroeconomic Advisers in St. Louis.
Wall Street analysts, whose estimates had been rising of late, were looking for about 3 percent growth in the fourth quarter. The economy's acceleration comes after back-to-back quarters of declining growth. The economy grew 5.6 percent in the first quarter of 2006 but then slowed to a 2.6 percent rate in the second and 2 percent in the third. "While the soft landing of the U.S. economy–such as it was–is largely over, the 3.5 percent growth in the fourth quarter probably overstates the underlying strength of the economy," Nariman Behravesh, chief economist at Global Insight in Lexington, Mass., told clients this morning. "The very good news is that the recession in housing continues to have a very limited impact on the rest of the economy."
Real personal consumption expenditures–a measure of consumer strength–rose 4.4 percent in the fourth quarter, compared with an increase of 2.8 percent in the third. Helping consumers afford their spending habits was a 5.4 percent jump in real disposable personal income, compared with an increase of 4.1 percent in the previous period. On the downside, real residential fixed investment tumbled 19.2 percent–a bit worse than the 18.7 percent drop in the third quarter–shaving 1.2 percentage points from GDP growth. Auto production was also a soft spot, subtracting 1.17 percentage points from fourth-quarter growth. For the year, GDP rose 3.4 percent vs. 3.2 percent in 2006.
The sharp upturn in growth was not accompanied by a similar surge in inflation. The core price index for gross domestic purchases, which measures prices paid by U.S. residents, drifted just a bit in the fourth quarter, rising 2.3 percent vs. 2.2 percent in the third. For the year, core inflation increased by 2.2 percent, up from 2.1 percent in 2005. The Federal Reserve will give an indication of what it thinks about growth and inflation when it concludes its policy meeting this afternoon. Many Fed watchers now think there is little chance that the Fed will cut interest rates anytime soon with the economy strengthening and inflation lingering. "The Fed will find this GDP report harder to swallow with inflation still nettlesome," says economist Robert Brusca of Fact and Opinion Economics.