Economy Grows at Sub-Par Rate in Final Quarter of 2002

The economy grew at a mediocre 1.4 percent annual rate in the final quarter of 2002, and many economists think it won't do much better -- and perhaps worse -- in the current quarter as the stagnant job market and war uncertainties make American consumers and businesses more cautious.

The government's final estimate of the gross domestic product in the final three months of last year was unchanged from its previous estimate a month ago, the Commerce Department reported Thursday. That matched analysts' expectations.

GDP measures the total value of goods and services produced within the United States and is considered the best barometer of the economy's health.

Optimistic economists believe the economy in the current January-March quarter grew at a rate of around 1.5 percent to just over 2 percent. But pessimists are forecasting growth of under a 1 percent rate. Some economists believe the first quarter experienced negative growth, meaning the economy shrank.

In another report, new claims for unemployment benefits last week fell by a seasonally adjusted 25,000 to 402,000, a two-month low, the Labor Department said. However, even with the drop, claims are at a level suggesting the job market remains sluggish.

The latest reading on GDP highlighted the economy's struggle to get back on a steady footing after getting knocked down by the 2001 recession.

The 1.4 percent growth rate marked a sharp slowdown in the economy from the 4 percent pace registered in the third quarter of 2002. Since the end of 2001, economic growth has been jagged, with a quarter of strength followed by a quarter of weakness.

That muddled climate -- along with concerns about the war, higher oil prices and a turbulent stock market -- has made businesses reluctant to lock into major financial commitments, namely capital investment and hiring. That is the biggest factor restraining the economy's ability to get back to full throttle.

Although businesses have largely battened down the spending hatches, consumers have been the main force keeping the economy going.

But consumers are turning more cautious -- especially as the job market has worsened. The nation's unemployment rate rose to 5.8 percent in February as the economy lost a whopping 308,000 jobs.

Economists are concerned about how consumers will behave in the months ahead, a main force that will shape the recovery. For now, though, economists are hopeful consumers will spend sufficiently to prevent the economy from sliding into a new recession.

In the final quarter of 2002, consumer spending grew at a rate of just 1.7 percent, slightly better than the government's previous estimate, but a sharp pullback from the 4.2 percent growth rate registered in the third quarter.

Business investment in equipment and software grew in the fourth quarter at a 6.2 percent rate, but spending on new factories, buildings and other structures was cut for the fifth straight quarter, subtracting from GDP in the fourth quarter.

The bloated trade deficit also was a drag on fourth-quarter GDP and a slower pace of inventory-building by business contributed less to growth than in the third quarter.

However, the housing market continued to add to economic growth, with spending increasing at a 9.4 percent rate. And spending by the federal government also helped out. That spending went up at a 11 percent rate in the final three months of 2002.

The Federal Reserve last week held interest rates steady at 1.25 percent, a 41-year low, saying they will closely monitor economic developments as the war on Iraq unfolds. Economists said the Fed won't hesitate to cut rates if the economy were to flash danger signals.

President Bush has called for $726 billion in tax cuts through 2013 to revive the economy. The Republican-controlled Senate, however, approved a budget for next year that would limit the tax reductions to $350 billion. The House has approved funding the full amount asked by the president.

The 1.4 percent growth rate for GDP in the fourth quarter was the slowest since the second quarter of 2002, when the economy expanded at a below-par 1.3 percent rate.

The GDP report also said that after-tax profits of U.S. corporations grew at a 4.1 percent rate in the fourth quarter of last year, up from a 2.1 percent growth rate in the third quarter. But for all of 2002, after-tax profits fell by 4 percent, on top of a 10 percent drop in 2001.

The lackluster profit environment is another reason why companies have been slow to make big hiring and capital spending commitments, a necessary ingredient for the economy's return to full health, economists say.