Home > Abrupt slowdown of US economy in last quarter
United States economic growth slowed to its weakest rate in three years in the last quarter of 2005 ending the year with an overall expansion of 3.5%, down from the 4.2% of 2004.
The US economy grew at an annual rate of 1.1% from October to December, compared with 4.1% in the previous three months. The drop was caused by reduced consumer spending amid soaring fuel prices, while the government also tightened budget expenditure post-Hurricane Katrina.
However economists predicted the drop was a temporary setback rather than the start of a long-term trend. "The economy hit a pothole in the fourth quarter. I’m not at all worried about the health of the economy," Mark Zandi, chief economist at Moody’s Economy.com said.
Economists point out several factors as behind the drop: an overall slowdown in consumer spending, from 4.1% to 1.1%, and a sharp 17.5% fall in spending on durable goods, particularly cars and a cooling of the housing market. The fall marked the steepest drop in spending on these items since the first quarter of 1987.
Analysts added that the GDP report partly reflected the impact of Hurricanes Katrina and Rita, which battered the Gulf Coast region in September closing down almost the whole of the Gulf of Mexico oil production and refinery capacity.
The announcement came as a surprise for Wall Street that was expecting a 2.8% fourth quarter expansion.
The release also comes a few days before President George Bush addresses Congress with the State of the Union speech. The White House has emphasized that the good performance of the economy will be one of the winning assets for this year’s mid term Congressional election. Furthermore, in spite of consumer spending slipping, price inflation rose during the fourth quarter with core inflation, which does not include the volatile energy and food prices, accelerating to a 2.2% rate of growth from 1.4% last time.
The fourth quarter numbers and tendency could be crucial since next week the Federal Reserve must decide on interest rates. For the last 18 months the Fed has been increasing rates in an effort to keep inflationary pressures in check.