The US economy slowed more dramatically than expected in the final three months of last year as housing posted its worst contraction in a quarter century, exports pulled back and inflation picked up steam, the Commerce Department reported today.
The economy grew at a 0.6 per cent annualized pace in the fourth quarter, half the expected 1.2 per cent pace of economists polled by Thomson's IFR Markets.
That's down from 4.9 per cent in the third quarter, and the 0.6 per cent rate was the slowest growth since the fourth quarter of 2002. Stephen Gallagher of Societe Generale described the fourth quarter growth as "'precariously close to the zero threshold".
Inflation jumped despite the economic slowdown, rising 3.9 per cent in the headline Personal Consumption Expenditures index.
The core PCE inflation index - important to Federal Reserve policymaking - rose 2.7 per cent, well out of the central bank's comfort zone and slightly higher than the 2.6 per cent expected core rate.
Even with those inflation numbers, Gallagher said that "for the FOMC, the figures should be close to expectations and do not materially alter growth forecasts for early 2008".
Limited inventories may provide some upside. The Fed has already demonstrated it will move aggressively to support growth.'
Business inventories were the big surprise in the GDP report. They went from being a major source of strength in Q3 to a major weakness in Q4, declining by $32.9 billion, after a $24.7 billion increase.
For forecasters, 'the miss relative to consensus was mainly due to a larger negative contribution from inventories than had generally been expected,' said Joshua Shapiro, economist at MFR. The inventory decline subtracted 1.25 percentage points in the quarterly growth calculation.