U.S. Economy: GDP Rose 0.6%, Less Than Anticipated (Update2)

By Courtney Schlisserman


Feb. 28 (Bloomberg) -- The U.S. economy expanded less than forecast in the fourth quarter as domestic spending declined and only an increase in exports prevented an overall contraction.

Gross domestic product rose at a 0.6 percent annualized rate, unchanged from the initial estimate last month, after a 4.9 percent gain in the third quarter, the Commerce Department said today in Washington.

``There's a better-than-even chance that we have actually entered a recession,'' Harvard University economist Martin Feldstein said in a Bloomberg Television interview. ``The numbers for December and January have basically been flat to down.''

The report, combined with figures today showing claims for unemployment insurance jumped last week, reinforced traders' expectations that the Federal Reserve will cut interest rates again and helped drive the dollar to a record low against the euro. Investors raised the odds of a three-quarter point cut in the benchmark rate by the end of the next meeting on March 18 to 34 percent from 10 percent yesterday.

Fed Chairman Ben S. Bernanke, testifying to the Senate Banking Committee today, signaled he's ready to lower interest rates again to sustain the expansion.

The median estimate in a Bloomberg News survey of 74 economists was for a 0.8 percent increase in GDP.

Jobless Claims

Harvard's Feldstein is also president of the National Bureau of Economic Research and a member of the group's business-cycle dating committee, which marks the beginning and end of expansions. He said in the interview it could be months before the NBER declares if a recession has officially started.

The Labor Department said initial claims for unemployment insurance climbed 19,000 last week to 373,000, higher than forecast. The level was the second-highest since a surge in claims in the aftermath of Hurricane Katrina in 2005.

``We have absolutely no momentum going into the first quarter,'' said Josh Shapiro, chief U.S. economist in New York at Maria Fiorini Ramirez Inc. ``Things are looking pretty grim for the economy. If we're not in a recession already, we're very close.''

The dollar, which had risen as much as 0.3 percent earlier today, erased its gains after the reports and reached a record low against the euro. It traded at $1.5212 at 4:02 p.m. in New York, after touching $1.5229 earlier. Stocks declined.

The trade deficit narrowed to an annualized $506.8 billion, adding 0.9 percentage point to GDP.

Excluding the improvement in trade, the economy would have shrunk at a 0.3 percent annual pace, the first decline since 2001, when the U.S. was last in a recession.

Rate Cuts, Stimulus

``Obviously there's been slowing and that's what we expected,'' said Ed Lazear, chairman of the White House Council of Economic Advisers, said in an interview with Bloomberg Television. ``We do think the Fed has moved quickly enough to help get the economy going,'' along with the $168 billion fiscal stimulus enacted this month, he said.

Consumer spending, which accounts for more than two-thirds of the economy, rose at a 1.9 percent annual rate in the fourth quarter, down from the 2 percent increase estimated last month, according to today's report.

Deteriorating sentiment is likely to keep restraining spending. Purchases may grow at a 1 percent pace this quarter, according the median estimate in a Bloomberg survey. The survey also projected 0.5 percent growth this quarter.

Slowdown, Not Recession

``I don't think we're headed to a recession, but there's no question there's a slowdown,'' President George W. Bush told a press conference in Washington today.

Consumer confidence fell this month to the lowest level since 2003 as the job market deteriorated, according to a report this week from the Conference Board, a New York-based research group. Americans' expectations for the next six months dropped to the lowest level since January 1991.

Adding to concerns about spending, revisions for the third and fourth quarters also showed smaller gains in incomes, according to today's report. Personal income increased at a 4.1 percent annual pace from October through December, compared with an initial projection of 4.5 percent.

Income growth may slow further in coming months as the labor market softens. The U.S. lost jobs for the first time in four years in January and weekly initial jobless for jobless benefits have risen.

Revisions

Fourth-quarter estimates for commercial construction, business investment on new equipment, government spending and inventories were also revised down.

Residential construction decreased at a 25 percent pace, more than previously estimated and the most since 1981. Declines are likely to continue through much of 2008.

Lowe's Cos., the world's second-largest home-improvement retailer, said this week that fourth-quarter profit fell and several ``challenging'' quarters remain as the worst housing slump in more than 25 years deepened.

``It will still be a tough housing market through the balance of 2008,'' Lowe's Chief Executive Officer Robert Niblock said in a Feb. 25 interview. ``It'll probably be into 2009 before you're seeing a recovery.''

Today's report is the second of three estimates released by the Commerce Department. The data will be revised again next month as more information becomes available.