US economy close to stalling in fourth quarter

The collapse of the US housing market caused the economy almost to stall at the end of the last year but prices continued to surge, increasing the threat of stagflation.

The economy grew at a 0.6 per cent annual rate in the last three months of the year, according to the first revision of the government’s fourth-quarter estimate of gross domestic product, unchanged from its previous forecast.

This compared with growth of 4.9 per cent in the third quarter and came as a disappointment to economists who had forecast a slight uptick to 0.8 per cent. For the whole of 2007, GDP rose by only 2.2 per cent, the weakest since 2002.

Fourth-quarter personal consumption expenditure was revised higher to an annualized 4.1 per cent from 3.9 per cent, although core expenditure, which strips out volatile food and energy purchases, held steady at 2.7 per cent.

The combination of increased pricing pressures and near dormant growth poses an unpalatable policy dilemma for the Federal Reserve which cannot use monetary policy to tackle both simultaneously.

Fed chairman Ben Bernanke signalled on Thursday in his testimony on Capitol Hill that that he remains prepared to keep cutting interest rates, in spite of the threat of inflation.

Adding to the unsavoury mix is the threat of rising unemployment. Initial jobless claims rose 19,000 in the latest week to 373,000, far higher than a rate of 350,000 rate forecast by economists, after the previous week’s estimate was also revised upwards.

After the reports the US dollar reversed earlier gains and plunged to a new low of $1.5150 against the euro.

One of the few positive details of the GDP report was that net exports remain strong, adding 0.9 points to the GDP growth rate calculation, compared with a 0.4 per cent contribution in the previous estimate.

However, this was offset by a downward revision to inventory investment and a more than 25 per cent decline in residential investment, the steepest decline since 1981.

“Economic growth was very weak in the fourth quarter—were it not for the addition of trade, the economy would have contracted in the fourth quarter,” John Ryding, chief US economist at Bear Stearns, said.