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GlobalSecurity.org In the News

Newsday January 28, 2006

4th-quarter spending dips

By Randi F. Marshall

The U.S. economy staggered through the end of 2005, as consumers slowed their spending to a crawl and businesses backed away from new capital investments.

Gross domestic product, the broadest measure of economic activity, grew by 1.1 percent in the fourth quarter - the lowest rate in three years - according to the Commerce Department. Although the measure is subject to revision, experts said the growth rate caused concern about the overall economy's strength.

"It's a wake-up call," said Anthony Chan, chief economist for JP Morgan Private Planning Services. "One quarter does not make a trend, but we have to be more on our guard."

Economic growth weakened nearly across the board, from consumers to businesses to government. Auto sales slowed, causing durable goods spending to drop 17.5 percent, the largest decline since 1987.

But companies didn't pick up the slack, increasing investments by just 2.8 percent, the weakest performance since the beginning of 2003. That reflected bare-bones capital equipment spending, a sign that businesses lack the confidence in the economy, or the consumer, to ramp up further.

"We saw a slowdown in business investing and while it may be a little more than we will see going forward, it's real and it will likely continue," said Joel Naroff, the chief economist for Commerce Bank.

Despite concerns to the contrary, Treasury Secretary John Snow suggested that the GDP data was an abberation. "I would not read too much into today's numbers," he said.

Perhaps the biggest head-scratching piece of yesterday's economic news is national defense spending, which dropped 13.1 percent in the fourth quarter. Chan called the data "bogus." "Those numbers from quarter to quarter don't reflect actual activity," he said.

Some experts suggested the decline may reflect fewer National Guard troops in regions devastated by the hurricanes last fall, or a lack of ship-building and other activity in those storms' aftermath. But most said that's not a complete explanation in a war-time economy.

John Pike, the director of Globalsecurity.org, a Virgina-based online defense research firm, suggested that the 13 percent decline translated into about $15 billion of defense spending. "That's real money even by Defense Department standards," Pike said.

Economists said yesterday they expected the final fourth quarter data would look better and that the first quarter would improve further. "It's definitely at worst a one-period blip that could be revised away," said Bill Cheney, the chief economist with John Hancock Financial Services in Boston.

Yet, there are still warning signals. The threat of inflation rose in the data released yesterday, with core inflation, which doesn't include food or energy, rising at a 2.2 percent clip, compared with 1.4 percent in the third quarter. And though new home sales rose in December, prices fell 4 percent compared with a year ago, a separate report said.

Copyright 2006, Newsday Inc.