The American economy picked up a little steam last quarter, growing at its fastest pace in a year and a half. Whether it can sustain that momentum is critical to millions of Americans out of work — and perhaps President Obama’s re-election chances.
The nation’s economic output grew at an annualized rate of 2.8 percent in the fourth quarter, the Commerce Department reported Friday, probably putting to rest last summer’s fears that a second recession was imminent. Other reports this week on manufacturing and consumer sentiment offered similar, if mild, encouragement.
“All in all, it’s not bad, but there’s no oomph,” said Jay Feldman, an economist at Credit Suisse.
Forecasts have called for such slow growth that the Federal Reserve on Wednesday said it planned to keep interest rates near zero through 2014. Even with the pickup in output, the pace last quarter was below the average of economic expansions in the United States since World War II. Given how much ground was lost during the Great Recession, the United States economy needs above-average growth right now.
Government spending is not helping, either. Not because it’s too big — but because it’s shrinking at a rapid pace.
Spending at the federal, state and local levels fell at an annual rate of 4.6 percent last quarter, providing a significant drag on total gross domestic product. At least at the state and local levels, the cuts are likely to continue as municipal governments shed workers and public services.
At the federal level, the biggest cuts were in national defense, which fell at a whopping annual rate of 12.5 percent. That’s an unusually large dip, and economists do not expect to see it repeated in the beginning of 2012.
But legislators may wield the ax elsewhere in the federal budget.
Congress has not decided whether to renew a temporary payroll tax cut and extended unemployment benefits past February, when both are scheduled to expire. Allowing these benefits to lapse would shave a percentage point off gross domestic product growth this year, said Ian Shepherdson, chief United States economist at High Frequency Economics.
“A great deal is at stake,” said Alan B. Krueger, chairman of President Obama’s Council of Economic Advisers. “Continuing that support for household consumption is extremely important for sustaining and strengthening the recovery.”
Growth in the fourth quarter was also driven mostly by companies rebuilding their stockroom inventories, not by consumers who were shopping more or foreign businesses buying more American-made products. And companies are likely to have only so much appetite for refilling their back-room shelves if consumers are still unwilling to buy those products.
Consumer spending rose at an annual pace of 2 percent, slightly better than the 1.7 percent in the previous quarter, Friday’s report showed. But based on early data, it looks as if consumer spending deteriorated toward the end of the year. This may be because of unseasonably warm December weather, which probably lowered families’ household electricity and gas bills. Consumers also benefited from lower gasoline prices, but appear to remain concerned about stagnant incomes.
“We did have some relief on gasoline prices in the fourth quarter, but that didn’t cause people to go out and spend more vigorously,” said Nigel Gault, chief United States economist at IHS Global Insight. “It just means they didn’t have to dip into savings.”
One of the more positive surprises in the report was in housing. Investments in sectors like home construction and repairs rose 10.9 percent last quarter. The housing sector is so small now, though, that it didn’t provide much energy.
Some economists found signs for optimism in other recent economic reports. New orders for manufactured durable goods, reported on Thursday, exceeded economists’ expectations in December by growing 3 percent.
Credit to small businesses has also been expanding steadily over the last year.
“I talk to banks and I talk to small businesses, and I promise you, credit’s been the main problem, just as it is after every financial crisis,” Mr. Shepherdson said. “Once you see credit start to grow again, provided there are no other encumbrances” — like last year’s Arab Spring, Japanese earthquake or debt ceiling debacle — “we should see small businesses expanding and hiring.”
Treasury Secretary Timothy Geithner, speaking at the World Economic Forum in Davos, Switzerland, echoed that sentiment, saying that the critical risks to the American economy were a worsening of Europe’s chronic sovereign debt crisis or a rise in tensions between Iran and the international community, which could stoke global oil prices. He said he expected the United States to grow about 2 to 3 percent this year, ahead of the 1.7 percent growth in 2011. Last year was the slowest growth in a non-recessionary year since 1947, economists at Credit Suisse said.
Many of the bigger American companies have reported strong profits in recent months, too.
Companies like General Electric and Lockheed Martin closed the year with record order backlogs, a sign that, at least for some businesses, demand is so strong that they cannot produce quickly enough. The backlogs portend solid growth in coming quarters, and suggest to some economists that the United States could weather the European debt crisis relatively unscathed after all.
On the other hand, corporate success has not translated into big benefits for American workers and consumers so far in this recovery. Today, the nation produces more than it did when the recession began in 2007, but it manages to do so with six million fewer jobs.
Companies seem reluctant to use their mounting profits to invest in new workers.
“Businesses have been holding much higher levels of cash than they have in past,” said Conrad DeQuadros, senior economist at RDQ Economics.
The bottom line is that our economy cannot clime out of a 8yr hole in just 4yrs. It is going to be a longer haul.
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