U.S. Economy Grew Less Than Forecast Last Quarter

The U.S. economy grew less than forecast in the fourth quarter, relying on exports as consumer spending slowed and the slump in homebuilding deepened.

Gross domestic product rose at a 0.6 percent annualized rate, unchanged from the initial estimate last month, after a 4.9 percent gain in the third quarter, the Commerce Department said today in Washington. The median estimate in a Bloomberg News survey of economists was for a 0.8 percent increase.

Excluding exports and imports, domestic spending contracted, a change from the first estimate, the department said. Combined with figures today showing claims for unemployment insurance jumped last week, the report reinforced traders' expectations for the Federal Reserve to cut interest rates again next month.

Fed Chairman Ben S. Bernanke yesterday signaled he's ready to lower interest rates again to sustain the expansion. Traders see a 100 percent chance of a half-point reduction to 2.5 percent by the end of the next meeting on March 18. Odds of a three-quarter point cut rose to 36 percent, from 10 percent.

Jobless Claims

The Labor Department said initial claims for unemployment insurance climbed 19,000 last week to 373,000, higher than forecast.

The dollar, which had risen as much as 0.3 percent earlier today, erased its gains after the reports and reached a record low against the euro. It traded at $1.5127 at 8:39 a.m. in New York, after touching $1.5147 earlier.

The median GDP estimate was based on 74 economists surveyed. Projections ranged from gains of 0.5 percent to 1.3 percent.

An improvement in trade prevented the economy from contracting last quarter. The gap narrowed to an annual pace of $506.8 billion, adding 0.9 percentage point to GDP.

Excluding the improvement in trade, the economy would have shrunk at a 0.3 percent annual pace, the first decline since the last recession in 2001.

Consumer Spending

Consumer spending, which accounts for more than two-thirds of the economy, rose at a 1.9 percent annual rate in the fourth quarter, down from the 2 percent increase estimated last month, according to today's report.

Declining sentiment is likely to continue to restrain spending in coming months. Purchases may grow at a 1 percent pace this quarter, according the median estimate in a Bloomberg News survey taken from Jan. 30 to Feb. 7. The survey also projected a 0.5 percent pace of expansion from January through March.

Consumer confidence fell this month to the lowest level since the start of the Iraq war as the job market deteriorated, according to a report this week from the Conference Board, a New York-based research group. Americans' expectations for the next six months dropped to the lowest level since January 1991.

Adding to concerns about spending, revisions for the third and fourth quarters also showed smaller gains in incomes, according to today's report. Personal income increased at a 4.1 percent annual pace from October through December, compared with an initial projection of 4.5 percent.

Job Market

Income growth may slow further in coming months as the labor market softens. The U.S. lost jobs for the first time in four years in January and weekly initial jobless for jobless benefits have risen.

Fourth-quarter estimates for commercial construction, business investment on new equipment, government spending and inventories were also revised down.

Residential construction decreased at a 25 percent pace, more than previously estimated and the most since 1981. Declines are likely to continue through much of 2008.