Strong consumer spending overcame large declines in auto manufacturing and housing to push the U.S. economy higher in the fourth quarter, according to a government report Wednesday.
U.S. gross domestic product grew at an unexpectedly robust 3.5 percent annualized pace in the final three months of the year, accelerating from a 2 percent pace in the third quarter.
GDP growth for all of 2006 was 3.4 percent, ahead of the 3.2 percent pace in 2005, according to preliminary estimates.
“People are out and about, and they are spending,” said Brian Levitt, a corporate economist with OppenheimerFunds in New York.
Weather that was milder than expected in many parts of the country, lower energy prices and a strong job market all put consumers in a spending mood, he said.
The increased spending didn’t fuel inflation, which grew at a 2.5 percent pace last year, down from 3 percent in 2005, according to the GDP report.
With inflation under control, the Federal Reserve kept its target federal funds rate – a benchmark for short-term interest rates – at 5.25 percent Wednesday.
The Fed has not raised rates since June. Since then, the average 30-year mortgage rate, which was 6.76 percent in July, dropped to 6.14 percent through December, Freddie Mac reported. It ticked up to 6.25 percent last week.
The direction of mortgage rates could help determine how severely housing markets contract in coming months.
“There is no indication in these data that the weakness in housing has adversely affected consumer spending, at least not yet,” said Steven Wood, chief economist with Insight Economics in Danville, Calif.
For the quarter, consumer spending surged 4.4 percent, adding 3.1 percentage points to GDP growth. That spending jump, teamed with stronger government spending and a 10 percent jump in exports, mitigated several areas of weakness:
Residential investment, a proxy for the housing market, plunged 19.2 percent during the quarter, enough to shave 1.2 percentage points off GDP growth, Wood said.
Motor-vehicle output plunged by 31.7 percent, shaving another 1.2 percentage points off economic growth.
Businesses sharply pared inventories, shaving 0.7 percentage points off GDP growth.
Bond and stock markets rose on the new report, and the U.S. dollar fell, reflecting investor sentiment that a Fed rate hike is less likely.
But Levitt said the strength shown in the GDP report could mean the Fed will raise rates.
“We believe this is a Fed that is on hold for much of 2007. The bias is towards tightening,” Levitt said.
Staff writer Aldo Svaldi can be reached at 303-954-1410 or asvaldi@denverpost.com.
3.5%
Annualized GDP growth in the fourth quarter of 2006, up from 2 percent in the third quarter
3.4%
GDP growth rate for all of 2006, up from 3.2 percent in 2005
2.5%
Inflation rate for 2006, down from 3 percent in 2005
5.25%
Federal funds interest rate, holding steady for the fifth straight Federal Reserve meeting
