U.S. Economic Growth Slows in Third Quarter

U.S. economic growth ground nearly to a halt in the last three months of 2005. The Commerce Department said Friday the economy grew at an annual rate of just 1.1 percent, compared to a 4.1 percent growth rate in the third quarter.

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MELISSA BLOCK, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.

MICHELE NORRIS, host:

And I'm Michele Norris. Some new numbers out today show the U.S. economy was surprisingly weak in the fourth quarter of last year. The Commerce Department's first look at the gross domestic product has the economy expanding at an annual rate of 1.1 percent. That's well below the previous quarter, and less than half of what was expected. Most economists agree on what's behind the slowdown, but, as NPR's Jack Speer reports, they differ on what it means.

JACK SPEER reporting:

The economists we talked to today all agreed on one thing. The slowdown was brought to you by rising energy prices. Bernard Baumohl is executive director of The Economic Outlook Group. He says higher oil and gas prices, along with increased borrowing costs, left consumers with little choice but to rein in their spending.

Mr. BERNARD BAUMOHL (Director, The Economic Outlook Group): Consumers now have this huge debt load, and they face rising interest rates in terms of servicing that debt. They've had higher energy costs, virtually no personal savings, and the household income has been growing below the rate of inflation, and when you put it all together, something had to give.

SPEER: And it was that slowdown in consumer spending, especially for so-called big ticket durable items such as cars and trucks, that was one of the major factors weighing on the economy. But a number of analysts also view the latest numbers with some suspicion. Joel Naroff is head of Naroff Economic Advisors. He thinks the sales incentives offered by the major automakers last year artificially boosted GDP in the third quarter while reducing it in the final months of the year.

Mr. JOEL NAROFF (President, Naroff Economic Advisors): We had the employee discounts in July. We had record sales in July. And they slowly came down from that point. So we had an artificially high consumer number in the third quarter and an artificially low consumer number in the fourth quarter. And really, if you average the two quarters together, you probably have growth somewhere in the 2-1/2 percent range, and that's where I think the economy is at at this point.

SPEER: And that view was echoed by Dudley Devorkin (ph), a Washington, D.C. area Chevy dealer. Devorkin says he witnessed firsthand the power of incentives, which at his dealership helped prop up SUV sales even as gas prices were spiraling upwards.

Mr. DUDLEY DEVORKIN (Automobile dealer, Washington, D.C.): I think right now manufacturers, they turn the faucet on and off. When they want to sell or move merchandise, I think they, you know, open up the rebates or the low interest rates, and it attracts people. And when they turn them off, business slows down.

SPEER: Still, Devorkin says it's clear consumer spending is taking a hit as prices for gasoline, natural gas and home heating oil all rise. Higher interest rates have also cut down on home refinancings, a recent source of ready cash for consumers. But not all economists believe the weak assessment released today is a sign the economy is necessarily headed for trouble. Some say there are already signs things have begun picking up in the first quarter of this year. Nariman Behravesh is chief economist at Global Insight.

Dr. NARIMAN BEHRAVESH (Chief Economist, Global Insight): We are very much in the camp that we think there will be a rebound in the first quarter. We're right now saying growth in the first quarter will be around 3.8 percent. We think autos will bounce back. We think defense spending, which is one of the sources of weakness in the fourth quarter, will bounce back.

SPEER: With the numbers released today, it's now possible to calculate a growth rate for the entire year. The U.S. economy expanded at a respectable pace of 3-1/2 percent in 2005. Still not clear is how the Federal Reserve will react to the slowdown when it meets next week.

Jack Speer, NPR News, Washington.

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