U.S. economy grows less than forecast as consumers struggle

A U.S. flag flies behind a Wall Street sign outside of the New York Stock Exchange.
By Alex Kowalski, Bloomberg News
Posted 1/27/12

WASHINGTON - 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 Friday 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.

“We’re still getting unsatisfactory job growth in terms of the amount of income it’s going to generate, so consumers are not in a position to go crazy,” Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, said before the report. “The U.S. economy is continuing to struggle. It’s just getting doses of adrenaline from the Fed every so often, which is not a long run solution.”

Shares Fall

Stock-index futures fell after report. The contract on the Standard & Poor’s 500 Index maturing in March dropped 0.2 percent to 1,312.3 at 8:37 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.

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.

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