The United States economy expanded by a disappointingly weak annual rate of 0.6 percent during the last three months of 2007, the government reported Wednesday, offering the latest indication that the United States is already suffering a substantial slowdown, and perhaps a recession.þþThe growth from October to December came in at half the rate forecast by most economists, and it was down strikingly from the 4.9 percent clip registered last fall. Over all, the economy expanded by 2.2 percent in inflation-adjusted terms for all of 2007, the slowest rate of growth in five years. þþ“We lost a lot of momentum and stalled in the fourth quarter,” said Mark Zandi, chief economist at Moody’s Economy.com. “This reinforces the odds for a recession.”þþThe latest evidence of trouble resounded swiftly in Washington, where the Senate was to take up consideration of a package of tax cuts agreed to last week by the Bush administration and House Democrats aimed at keeping the economy from sliding into recession.þþ“The stalling of the United States economy last quarter makes the need urgent for significant economic stimulus,” Senator Charles E. Schumer, the New York Democrat who is chairman of the Joint Economic Committee, said in a statement. “Alarm bells should be going off.” þþBut some economists say the fate of the economy is already sealed: While stimulus spending could ease the bite of a downturn, it can no longer avert one.þþ“The country is now teetering on the edge of recession,” wrote Bernard Baumohl, managing director of the Economic Outlook Group, in a note to clients. “It is very doubtful that anything Washington can put together will work fast enough to revive economic activity this year.”þþThe slowdown reported by the Commerce Department on Wednesday underscored the array of challenges confronting the economy, which has emerged as the key issue in a presidential race that only months ago seemed likely to focus on the war in Iraq. þþHousing prices have been plummeting, depriving Americans of a crucial source of wealth and curbing spending. Banks have lost tens of billions of dollars on bad mortgage bets, leaving them reluctant to lend, thus dampening new investments. The job market has been slowing, taking wages out of the economy and further constraining growth.þþYet even as economic activity grinds down, the report added fresh reason to worry about inflation — rising prices propelled by the high cost of energy, food and other crucial goods. Over all, the prices of goods purchased by Americans swelled by 3.8 percent in the last three months of 2007, compared with 1.8 percent in the previous three months. Excluding energy and food, prices still climbed by 2.5 percent for the quarter. þþ“The one-word description of this report is ‘stagflation,’ ” said Ethan S. Harris, chief United States economist at Lehman Brothers, using a term that harks back to the 1970s, when many economies throughout the world saw both rising prices and stagnant growth in the midst of an energy crisis. “This isn’t exactly great news for the economy going forward.” þþThe growing threat of inflation highlighted the difficult ground that must be navigated by the Federal Reserve as it charts policy. In recent months, the Fed has been dropping interest rates aggressively to encourage consumers to spend and businesses to invest, while putting aside worries that cheap credit will exacerbate inflation. Some economists assert the Fed is risking larger problems down the road to stave off immediate discomfort. þþThe Commerce Department report seemed unlikely to alter the Fed’s course, economists said. The market has been anticipating that the Fed will ease the rate at which banks lend to one another overnight by another half-point on Wednesday afternoon. That rate indirectly affects rates charged by banks for a host of commercial services, from auto loans to mortgages.þþ“This report is going to mean little to the Fed,” said Ellen Ms. Zentner United States macroeconomist at Bank of Tokyo-Mitsubishi in New York. “It’s a backward looking report.”þþThe focus now is on what lies ahead. Policy makers and investors are looking to a snapshot of the nation’s employment situation scheduled to be released on Friday. þþOver the last three years, the pace of job creation has gradually slowed. Earlier this month, the Labor Department reported that the economy added only 18,000 new jobs in December. That report sent markets reeling worldwide and prompted some economists to declare that a recession was a foregone conclusion. It contributed to the Fed’s decision to ease interest rates.þþBut in recent days, fresh signals have suggested that the job market may not be deteriorating. New claims for unemployment have been dropping since mid-December. On Wednesday, the ADP National Employment Report, which tracks changes at companies with payrolls overseen by ADP, reported that the economy added 130,000 new private sector jobs in January.þþThe ADP report has been a far from perfect indicator, but if it proves an accurate preview this time, that would cushion against fears of a rapid unraveling.þþThe report on the economy, however, substantially dampened hopes for another source of cushioning: American exports, which slowed during the fourth quarter, to 3.9 percent from 19.1 percent in the previous three months. þþIn recent months, some economists have suggested that American companies might find enough sales abroad to compensate for deteriorating business at home, pointing to faster growing economies in Europe, Asia and Latin America. Slowing export growth suggests that weakening demand for goods in the United States is slowing economies around the world. þþThe report reinforced how the unraveling of the American real estate market continues to assail the economy, with spending on new-home building plunging 23.9 percent in the last three months of 2007 — the largest quarterly drop in 26 years. The report showed a slight erosion in consumer spending, which amounts to 70 percent of the American economy. Such spending grew by 2 percent in the last three months of 2007, the government reported, down from 2.8 percent in the third quarter.þþ“It’s all the headwinds that consumers are facing,” Ms. Zentner said. “Consumers have run out of funding now that they can’t tap into their houses for finance They’re facing high gas prices and overall inflation. They’re getting bombarded by headlines about how bad the economy is, which makes them worry about their personal finances.”þþBut some analysts said fears of a downturn are overblown, suggesting that the slowdown amounts to the momentary leftovers of the global credit panic that broke out last summer, as the extent of mortgage losses emerged. The report showed that sales of goods in the United States to businesses, consumers and the government inched up by 1.4 percent in the last quarter — hardly robust but not a disaster. þþ“The economy didn’t collapse,” said Michael Darda, chief economist at MKM Partners, a research and trading firm. Global credit markets have already loosened substantially, he said, adding that if the United States can avoid recession for a few more months, the low interest rates delivered by the Fed will then kick in, fueling fresh economic activity.þþThe slowdown was largely the result of a plunge in inventory as businesses pulled back from amassing products in anticipation of sluggish days ahead. Private businesses like factories and retailers decreased their inventories by $3.4 billion in the fourth quarter after expanding them by $30.6 billion in the third.þþWhile that is consistent with a slowdown, it also means that inventories are now lean, making a sharp pullback in production less likely.þþ“That takes some of the edge off the report,” Mr. Zandi said. þþ
Source: NY Times
