Good or Bad? The US Economy grows only at 1.1 % during the 4th quarter

[Neil D]

WASHINGTON — The United States economy grew at only a 1.1-per-cent annual rate in the fourth quarter, the slowest pace in three years, amid belt-tightening by consumers facing spiraling energy costs.

Even with the feeble showing from October through December, the economy registered respectable overall growth of 3.5 per cent for all of 2005 — a year when business expansion was undermined by devastating Gulf Coast hurricanes.

The Commerce Department report, released Friday, offered the latest figures on gross domestic product, the best measure of the country's economic standing.

The 1.1 per cent growth rate in the fourth quarter marked a considerable loss of momentum from the third quarter's brisk 4.1 per cent pace. The fourth-quarter's performance was even weaker than many analysts were forecasting. Before the release of the report, they were predicting the GDP to clock in at a 2.8 per cent pace.

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The 1.1 per cent growth rate was the smallest gain since the final quarter of 2002, when the economy expanded at just a 0.2 per cent rate.

The weakness in the final quarter of last year reflected consumers pulling back, cuts in government spending and businesses being more restrained in their capital spending.

Economists felt that the slowdown in the final quarter was more of a temporary setback rather than any harbinger of a sustained period of economic weakness ahead.

“The economy hit a pothole in the fourth quarter. I'm not at all worried about the health of the economy,” said Mark Zandi, chief economist at Moody's Economy.com. Mr. Zandi believes that economy in the current January-to-March quarter is already doing better and predicts economic growth will come in around a 4 per cent pace.

In the fourth quarter, though, consumers turned cautious as high energy prices and rising borrowing costs took their toll budgets.

Consumer spending rose by just 1.1 per cent pace in the fourth quarter, the slowest since the second quarter of 2001 when the economy was suffering through a recession.

Most of the weakness came as people sharply cut back on purchases of big-ticket goods, including cars and appliances. Spending on such “durable” goods dropped by a hefty 17.5 per cent rate in the final quarter, the sharpest decline since the first quarter of 1987.

Another source of weakness in the fourth quarter was government spending, which had contributed to overall economic growth in prior quarters. In the fourth quarter, government spending declined at a 2.4 per cent pace, the largest drop since the first quarter of 2000.

Businesses, meanwhile, boosted spending on equipment and software in the final quarter of last year at a 3.5 per cent rate, the smallest gain since the first quarter of 2003.

Spending on residential projects also rose at a 3.5 per cent pace in the fourth quarter. That was down from a 7.3 per cent pace in the prior quarter and an additional sign that the housing boom is losing some of its steam.

An inflation gauge tied to the GDP report showed prices rose at 2.6 rate in the fourth quarter, down from a 3.7 per cent pace in the third quarter.

However, when food and energy prices are excluded, “core” inflation — which the Fed watches closely — rose at a 2.2-per-cent rate in the fourth quarter, a pickup from the 1.4 per cent growth rate in the third quarter. That suggests inflation is filtering into a variety of other prices.

To fend off inflation, the Federal Reserve is expected to boost interest rates next Tuesday one-quarter percentage point to 4.50 per cent. It will be last meeting for Alan Greenspan, who will retire that day after more than 18 years running the central bank.

Mr. Zandi said the core inflation figures contained in Friday's report reinforces his belief that the Fed will tighten next week and again on March 28.

President Bush, in his State of the Union address Tuesday evening, plans to put the spotlight on some pocketbook issues, including high energy prices, tax cuts and expensive health care costs.

Public concern about the economy is still relatively high, according to polls. Sixty-four per cent described economic conditions as fair or poor, while 34 per cent said they are excellent or good, according to the Pew Research Center for People & the Press.

The 3.5 per cent increase in GDP for all of 2005, was down from a 4.2 per cent gain in 2004. Economists predict the economy for all of this year will turn in another good performance with growth topping 3 per cent.

[Bravus]

(good because it helps with the mid-terms)

[Dr. Shane]

I think it is really sad when bad news makes someone happy because it may mean political gain for them.

A slowing economy means people are or will be hurting economically. These are not chess pieces in a game. They are real people with real families and real homes and real car payments. How can someone be happy that others are going to suffer just because that may help their political party?

Energy prices are hurting the economy without a doubt. President Bush has even stated that it is like a tax. However we don't want the economy to grow too fast either because then we will have problems with inflation. 3% or 4% is a good rate of growth. Hopefully energy prices are stablizing and the economy will maintain itself.

The Republicans biggest enemy in midterms is themselves. Since Newt Gingrich left Congress the Republican party has taken up the political tactics the Democrats used in the 1980s. Their fate will likely be the same.

[Bravus]

Yeah, I was being super-brief, which may have obscured the point a bit.

Of course slow economic growth is bad news in one sense (although it's worth noting that the market concept of eternal growth is environmentally unsustainable and irresponsible, but that's another discussion for another time).

The reason I said that this *news* is good news is because it exposes the Big Lie that cutting taxes while increasing spending is good for the economy. And a change in the midterms and at the next presidential election is the first step in changing that approach to government.

The slowing economy is not good news, sure, but it's the inevitable result of a certain set of policy settings, and it's good that that is becoming clear in time for it to make some difference.

[Dr. Shane]

Cutting taxes and interest rates makes good economic sense when the economy is in a recession because it stimulates the economy. That much is true. What most politicians won't say is that once the economy starts growing and maintaining a healthy growth, the taxes and interest rates need to go back up to slow down the economy so it doesn't grow too fast and cause inflation.

Often times when taxes are cut, revenues increase because of the increased economic activity caused by the tax cuts. That was the case with JFK's, Reagon's and GW Bush's tax cuts. However a nation cannot keep cutting taxes to stimulate the economy and never raise them or it will get to the point where there are no taxes to cut.

What some politicians want to do is take the credit for cutting taxes but not for raising them. Reagon's advisors told him in the second term of his presidency that he needed to raise taxes but he refused to do it. So the next President, George H.W. Bush ended up doing it and President Clinton after him.

Goverment spending is a poor way to stimulate the economy. The only way it can do so is through borrowing. If the government spends money through direct taxation (instead of borrowing) it takes money from the private sector and spends it in the public sector. There is no net gain. Either General Motors, Kraft Foods, American Airlines or Pilsbury invests the money in the economy or government takes the money from them and spends it. When the government borrows money it stimulates the economy in the short term but future generations will need to pay it back.

Fuel prices are currently acting like a tax increase and are applying the brakes to the economy. If the politicians were good stewarts, they would raise taxes when the economy stabilises and use the increased revenue to pay down the national debt. Yet that is not what they do. When revenues increase government increases spending. The nation needs a few leaders like Newt Gingrich that knows how to keep spending down when revenues are increasing.

[Neil D]

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Public concern about the economy is still relatively high, according to polls. Sixty-four per cent described economic conditions as fair or poor, while 34 per cent said they are excellent or good, according to the Pew Research Center for People & the Press.

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A slowing economy means people are or will be hurting economically. These are not chess pieces in a game. They are real people with real families and real homes and real car payments. How can someone be happy that others are going to suffer just because that may help their political party?

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If congress were to give some relief to middle income wage earners, there might not be this unrest...As it is, the republicans have made it thier business to bring up these issues, and they now control congress and can pass virtually anything, and yet they have not fulfilled thier own agendas...or at least thier campaign speaches.

As much as industry wants laws passed to favor thier companys, they must ultimately realize that unless they can sell thier widget at an equatable price, ulitmately the company will go belly up as the common man will not be able to afford the widget that the company makes. Laws that favor companys/industry exclusively are especially destructive in the long run. Laws must be made for the common man, to protect and to encourage the thriving of the common man, so that he will ulitmately purchase the widget of his choice.

[Dr. Shane]

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If congress were to give some relief to middle income wage earners

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How can Congress give relief to middle income workers? What kind of relief? How is this tied to economic growth or inflation? Please try to tie this all together.

[Neil D]

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How can Congress give relief to middle income workers? What kind of relief? How is this tied to economic growth or inflation? Please try to tie this all together.

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It's the middle income workers who pay the most taxes. It's the middle income workers who pay for food and clothing and keep the economy going. The middle income workers don't mind paying taxes, if it was going toward something that would make thier lives better...instead of war, why not pay taxes for health care....or child care centers or new roads [which are deplorable in the west]. As it is, we are taxed federally for roads, that do not seem to be fixed, and by the state for the repair of bridges. I see taxes going out for guns and to Haliburton, but where is the taxes monies to make my life better? Where are the moneys that went to the schools, and to fund the public poor? I pay it, Shane, but I don't see it at work for me....I want to see my tax dollars at work...not in some congressmans pocket....Why isn't there money to create mass transits systems, or upgrade the current mass transit systems? It's because the money is going somewhere else...somewhere overseas....somewhere futile...Where are the oversite committees that over see congress to keep it's own ethics? Where are the oversite committes that keep big business in check in preventing monopolies? Where are the oversite commitees that allow stockholders the power to hold thier CEOs and CFO in accountable for thier employees stock options, and pensions plans and to keep those good ol' boys paycheck from being 12 times larger than the least paid employee?... Why are we not funding research for bee mite control? [You may not know this, but your almonds, that you like to eat, went up in price over 100% in the last 5 years. That is due to a shortage in bee hives and lack of pollentation. This lack of pollenation will affect the price of food slowly but surely. No bees, less food, prices jumps...It is already happening...And biological cures don't happen very easily.

Middle america doesn't mind working, but they do mind working under deplorable conditions...Things are NOT better now than they were 4 or 6 years ago. And I am still paying for things that are NOT helping me....

I can not tie it together because it is happening from all directions... And while the professionals are talking about various problems in their work places, those that make things happen [politicans, lobbyists], can not or will not, as they have been given over to a delusion [working thier agendas]. And thus, we have American, like the frog in the frying pan, slowly boiling to death, and not aware of it....All the while, if they had just seen the real problems, they could have corrected them....

I know, this isn't making much sense to you, Shane...It's just that we need more dialogue between cultures, ie ag culture, manufacturing culture, economic culture, enviormental culture ...and it doesn't look like we are getting anywhere.

[Dr. Shane]

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It's the middle income workers who pay the most taxes.

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This is incorrect. The top 1% of income earners pay over 34% of the income taxes. Over 83% are paid by the top 25% of income earners. The top 50% pay over 96% of income taxes. That is why tax cuts always help the rich. They are the ones that pay the taxes.

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It's the middle income workers who pay for food and clothing and keep the economy going.

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The wealthy not only pay for their own food and clothing but pay for all the poor on the welfare roll too. Everyone contributes to the economy. All classes - rich, poor and middle class - play a role in keeping an economy healthy.

This past year I made just over $44K and when I filed my income tax I only had to pay a little more than $300. I don't mean I had to pay in $300. I mean I get all that was withheld from my paychecks back except for $300. My $300 doesn't build many bridges, fight many wars or fund many welfare programs.

Government programs are not the answer to helping an economy. The Great Depression was drug out because of FDR's attempts at micromangaing the economy. President Hoover did the same thing which may be the reason the country slipped from a recession into the Depression in the first place.