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US economy hits the brakes in fourth quarter
Yahoo News/AFP
January 27, 2006

WASHINGTON (AFP) - US economic growth slowed dramatically in the last three months of 2005 to 1.1 percent, from 4.1 percent in the previous quarter, the government said.

The Commerce Department said that over all of 2005, the gross domestic product ( GDP) of the world's biggest economy grew by 3.5 percent, down from 4.2 percent in 2004.

Giving its first estimate of GDP growth for the fourth quarter, the department said the slowdown was due largely to weak auto sales, slower business investment, a rise in imports and a large drop in federal spending.

It was the weakest US growth figure in three years and will intensify debate over whether the Federal Reserve should call a halt to its campaign of interest rate hikes when it meets on Tuesday.

But the GDP report also showed inflationary pressure building.

The core personal consumption expenditure price index -- a key measure of inflation watched closely by the Fed -- rose at a 2.2 percent annual rate in the quarter.

That was above the Fed's informal target range of 1.0 percent to 2.0 percent.

"This is a disappointing release ahead of the Fed meeting, but I don't think it will derail a rate hike next week. But it does put a question mark on how far US rates will go up," ECU Group chief economist Neil MacKinnon said.

"There is a whiff of stagflation here that will be disconcerting for financial investors," he said, referring to the 1970s phenomenon of falling growth coupled with rising prices.

The dollar slumped on the GDP report, and stock futures headed down. Wall Street economists expected fourth-quarter growth to come to 2.8 percent.

The report also showed that over 2005, the personal savings rate of Americans was negative for the first year since 1933.

A spending binge by US consumers on the back of a red-hot property market has done much to elevate GDP growth in recent years. But the housing sector is now slowing, creating the fear that consumer spending could be hurt.

In the fourth quarter, consumer spending increased at an annual rate of 1.1 percent, down heavily from 4.1 percent in the third quarter. It was the slowest spending pace since the last recession in mid-2001.

The fall was largely due to a collapse in auto sales, which alone subtracted 2.1 percentage points from growth. Spending on durable goods such as washing machines and refrigerators fell 17.5 percent, the biggest drop in 18 years.

The Commerce Department report is only a first estimate, and so is subject to revisions, with another estimate based on more comprehensive data due out on February 28.

"This poor performance should be taken cautiously, as the main surprise came from government consumption, which fell sharply in the fourth quarter due to specific factors (defence)," IXIS US economist Marie-Pierre Ripert said.

Federal government consumption and gross investment slumped 7.0 percent in the fourth quarter. National defence spending fell 13.1 percent.

Ripert predicted GDP growth in the first three months of 2006 would show a rebound to about 3.8 percent, more in line with the US economy's pace in recent quarters.

Commentary:
The only way a republican president can create the illusion of growth is by borrowing tons of money (and giving a lot of it away in tax cuts). During the past 25 years (since the Reagan tax cut) the US has borrowed over seven trillion dollars. The ONLY think keeping the economy going is government spending and record deficits. The problem with this insanity is someone has to pay for all the debt created from tax cuts - the next generation.

There's a high probability we're either in a recession or heading into one.