Washington, DC, January 27, 2006--Growth in the economy slowed dramatically to a 1.1% annual rate in the fourth quarter, the weakest growth in three years, the Commerce Department estimated Friday.
The slowdown in real gross domestic product from 4.1% in the third quarter to 1.1% in the fourth was largely due to weak auto sales, slower business investment, a rise in imports and a large drop in federal spending.
Inventory building was the main engine of growth in the quarter. Absent inventories, final sales fell 0.3%, the first decline since the final quarter of recession in 2001.
As growth slowed, core inflation heated up. The core personal consumption expenditure price index--which excludes food and energy prices--rose at a 2.2% annual rate in the quarter, above the Federal Reserve's 1% to 2% target range. In the past year, the core PCE index has increased 1.9%
The report puts the Federal Open Market Committee in a quandary. If growth were to remain tepid, the Fed would be obligated to hold rates steady or even cut them. But the continued inflation pressures argue for higher rates.
In any event, most economists believe the slump will be temporary, with growth resuming its 3.5% pace in the first quarter and beyond.
For its part, the FOMC is expected to raise the federal funds target rate to 4.50% at its meeting next week and to 4.75% in March to maintain vigilance against inflation.
For all of 2005, gross domestic product increased 3.5%, following gains of 4.2% in 2004 and 2.7% in 2003. From the fourth quarter of 2004 to the fourth quarter of 2005, the economy grew 3.1%.
In nominal terms, GDP totaled $12.48 trillion in 2005.
The personal savings rate fell 0.5% in 2005, the first decline since 1933.
In the fourth quarter, consumer spending increased at an annual rate of 1.1% after 4.1% in the third quarter. It was the slowest spending pace since the depths of the recession in the second quarter of 2001. The deceleration was largely due to a collapse in motor vehicle sales, which alone subtracted 2.1 percentage points from growth.
Spending on durable goods fell 17.5%, the biggest drop in 18 years.
For all of 2005, consumer spending increased 3.6%, contributing 2.5 percentage points to growth.
Investments in homes also slowed in the fourth quarter, from a 10.6% annual rate to 3.5%. For the year, residential investment increased 7.2%, adding 0.4 percentage points to growth.
Business fixed investment was the lowest in three years, rising at a 2.8% annual rate in the quarter after an 8.5% gain in the third quarter. Investments in equipment and software increased 3.5% after 10.6% in the third quarter. The slowdown was widespread, from software and computers to industrial equipment.
For all of 2005, business fixed investment increased 8.5%, adding 0.9 percentage points to growth
With both consumer and business demand slowing, output went into rebuilding inventories, which had been severely depleted. The change in inventories was $39 billion, adding 1.4 percentage points to GDP.
For all of 2005, inventories subtracted 0.3 percentage points from growth.
Imports rose at a 9.1% annual rate in the quarter, while exports grew 2.4%. The trade deficit subtracted 1.2 percentage points from GDP.
For all of 2005, the trade gap subtracted 0.3 percentage points from growth.
Government spending fell 2.4% in the quarter, including a 7% drop in federal spending. Defense spending fell 13.1%, the biggest drop in five years. State and local spending increased 0.4%.
For all of 2005, government spending grew 1.7%, adding 0.3 percentage points to growth.
