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The Honolulu Advertiser
Posted on: Saturday, January 28, 2006

4th quarter growth weakest in 3 years

By Jeannine Aversa
Associated Press

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WASHINGTON The economy slowed to a near crawl in the final quarter of 2005, a listless showing that was the worst in three years. However, growth was respectable for the year and is expected to perk up again soon.

Gross domestic product was at an annual rate of just 1.1 percent from October through December, compared with the third quarter's brisk 4.1 percent pace, the Commerce Department reported yesterday.

Belt tightening by consumers, businesses and the government figured into the fourth quarter's slowdown.

GDP, which measures the value of all goods and services produced within the United States, is the best barometer of the economy's fitness.

The economy's growth rate was 3.5 percent for all of 2005 a year when the country coped with fallout from lofty energy prices and the devastating Gulf Coast hurricanes.

Analysts called the GDP figure for all of 2005 solid, although it was down from 2004's 4.2 percent gain.

"Considering the impact of the hurricanes and record heating bills last year, the economy continues to show remarkable resilience," said Bill Cheney, chief economist at John Hancock Financial Services.

Looking at the fourth quarter, economists felt the slowdown was more of a temporary setback rather than a harbinger of a sustained period of economic troubles ahead.

"The economy hit a pothole in the fourth quarter. I'm not at all worried about the health of the economy," said Mark Zandi, chief economist at Moody's Economy.com.

Zandi believes the economy in the current January-to-March quarter is already doing better and predicts growth will come in around a 4 percent pace.

For all of 2006, analysts project economic growth to top 3 percent.

Consumers turned cautious in the final quarter as high energy prices and rising borrowing costs took a toll on their budgets. Their spending grew at a 1.1 percent pace, the slowest since the second quarter of 2001 when the economy was suffering a recession.

Most of the weakness came as people cut back on purchases of big-ticket items, such as cars. This spending dropped by a hefty 17.5 percent rate, the sharpest decline since the first quarter of 1987.

Businesses also were more restrained, boosting spending on equipment and software at a 3.5 percent rate in the fourth quarter, the smallest since the first quarter of 2003.

Another factor restraining overall GDP in the fourth quarter: federal government spending, which fell at a 7 percent rate, the biggest drop since the third quarter of 2000.

Analysts, skeptical about this decline, believed it would be reversed, especially given spending planned for the war in Iraq and hurricane cleanup and rebuilding.

While growth slowed in the fourth quarter, inflation picked up, according to one price measure in the report that is closely watched by the Federal Reserve.

"Core" prices excluding food and energy costs rose at a 2.2 percent rate in the fourth quarter, up from a 1.4 percent growth rate in the third quarter.