The U.S. economy expanded less than forecast in the fourth quarter as consumers curbed spending and government agencies cut back, validating the Federal Reserve's decision to keep interest rates low for a longer period.
Gross domestic product, the value of all goods and services produced, climbed at a 2.8 percent annual following a 1.8 percent gain in the prior quarter, Commerce Department figures showed today in Washington. The median forecast of 79 economists surveyed by Bloomberg News called for a 3 percent increase. Excluding a jump in inventories, growth was 0.8 percent.
Fed officials this week said they were concerned about the economy's lack of vigor two years after the last recession ended, prompting a pledge to keep interest rates low into 2014. The improvement in the job market has yet to translate into gains in wages large enough to propel bigger gains in household spending, which accounts for about 70 percent of the economy.
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"We're going into 2012 with less momentum than people were thinking," said Michael Hanson, a senior U.S. economist at Bank of America Corp. in New York. "Income growth was modest and the savings rate came down, and those are not sustainable ways to get consumers to contribute going forward."
Stock-index futures fell after report. The contract on the Standard & Poor's 500 Index maturing in March dropped 0.5 percent to 1,308.2 at 9:04 a.m. in New York.
Growth projections in the Bloomberg survey ranged from 2.4 percent to 4.5 percent.
For all of 2011, the world's largest economy climbed 1.7 percent, down from 3 percent a year earlier.
Consumer spending rose 2 percent in the fourth quarter, little changed from the 1.7 percent gain in the prior three months. The median forecast of economists surveyed projected a 2.4 percent increase.
After-tax income adjusted for inflation increased at a 0.8 percent annual rate in the final three months of 2011 after falling 1.9 percent in the prior period. For all of 2011, it fell 0.1 percent.
The savings rate decreased to 3.7 percent, the lowest levels since the last three months of 2007, from 3.9 percent in the third quarter.
Retailers Discount
Consumers' resilience is in question. Spending at retailers lost momentum each month in the fourth quarter, slowing from a 0.7 percent gain in October to a 0.1 percent increase last month. Merchants including Macy's Inc., Gap Inc. and Target Corp. cut prices to attract more business during the holiday shopping season.
Spending failed to meet expectations even as inflation took a smaller bite out of Americans' wallets. A measure of prices tied to consumer spending advanced at a 0.7 percent pace last quarter, down from 2.3 percent in the prior period and the smallest gain in more than a year. That compares with the Fed's long-run goal of 2 percent.
Government agencies also struggled last quarter as they cut spending at a 4.6 percent annual rate, the fifth straight decline. For all of 2011, government spending dropped 2.1 percent, the biggest decline since 1971.
Stockpiles were rebuilt at a $56 billion annual pace, adding 1.9 percentage points to growth.
Business investment remained a bright spot. Corporate spending on equipment and software rose at a 5.2 percent annual rate last quarter. While down from the prior period's 16 percent gain, recent reports indicate it will probably rebound early this year.
Orders for durable goods like computers and machinery climbed more than forecast in December, a Commerce Department report showed yesterday.
The gain in orders at the end of 2011 "sets up a relatively firm trajectory" for investment, Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, said in a note.
"For many products, demand has been above our ability to produce," Mike DeWalt, director of investor relations at Caterpillar Inc., said on a conference call with analysts yesterday. While the world's biggest maker of construction and mining equipment gas invested in factories to boost production, DeWalt said his company is, "still very tight on many products and are currently quoting extended delivery times for them."
More Homebuilding
Home building also picked up, adding to signs the industry is stabilizing. Construction of residential real estate climbed at an 11 percent annual rate, the best performance since the second quarter of 2010. For all of 2011, the industry shrank 1.4 percent, the smallest decline since 2005, the last year homebuilding grew.
A deepening crisis in Europe may also hinder expansion. The International Monetary Fund this week cut its forecast for global growth in 2012 and said the euro crisis threatens to hamper the world economy.
"We feel great about where we see retail sales in the U.S., but certainly remain cautious as we look forward, given the tentative nature of the overall economy and consumer confidence," John Olin, chief financial officer of Harley- Davidson Inc., said during a Jan. 24 conference call. "We are more concerned about retail sales in Europe, given the fact that they may already be in recession or may slip into recession."
The nation's biggest motorcycle maker, based in Milwaukee, said sales rose 12 percent in the U.S.
Fed officials said this week their benchmark interest rate will stay low until at least late 2014 and they forecast unemployment will "decline only gradually."
Bloomberg News
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