Economy grew at a faster pace at end of 2011

Posted on March 1, 2012

The economy grew at a slightly faster pace in the final three months of last year, and Americans earned more income than previously reported. That could set the stage for stronger growth this year.

The Commerce Department said Wednesday that the economy expanded at a 3 percent annual rate in the October-December quarter — the fastest pace since the spring of 2010. It exceeded the previous estimate of 2.8 percent. And it was better than the third quarter’s 1.8 percent growth rate.

The growth estimate was revised up because consumers spent more than first thought, and businesses cut spending by much less. Imports rose by a smaller amount.

The report also showed that incomes rose in the second half of last year by more than previously estimated. Americans saved more, too.

Income growth is crucial. Economists have worried that recent gains in consumer spending weren’t sustainable without more pay. Higher incomes also make it easier for Americans to pare debts.

After taxes, inflation-adjusted incomes rose 1.4 percent in the fourth quarter. That’s nearly double the first estimate.

And in the third quarter, incomes rose 0.7 percent, compared with earlier estimates of a 1.9 percent drop.

The savings rate was also revised higher. Americans saved 4.5 percent of their incomes in the October-December quarter. That was down slightly from the third quarter. But it topped the previous 3.7 percent estimate for the fourth quarter.

Consumer spending rose 2.1 percent in the fourth quarter, powered by a jump in spending on autos and other long-lasting goods. That’s an improvement from the third quarter. And it’s much better than spending during the spring, when high gas prices nearly brought consumer spending to a standstill.

Most of the growth in the fourth quarter was driven by companies restocking their shelves. Many had cut their inventories over the summer, when they thought the economy was on the verge of a recession.

That didn’t happen. In fact, the economy has steadily improved since then. Still, companies likely scaled back the pace of their restocking at the start of the year to match the pace of consumer spending. That should slow growth in the current quarter.

Economists predict growth at an annual pace of 2 percent in the January-March quarter, according to a survey by the National Association of Business Economics. Growth will reach 2.4 percent for the full year, up from 2011’s increase of 1.7 percent, the survey found.

A host of recent data has made many analysts more optimistic about this year’s prospects. Companies have stepped up hiring, pushing the unemployment rate down for five straight months to 8.3 percent.

U.S. factories boosted output last month and December was their strongest month of growth in five years. Consumer confidence rose to its highest point in a year this month, the Conference Board reported Tuesday. That could signal Americans are ready to step up spending, which would fuel more growth. Consumer spending accounts for 70 percent of economic activity.

Some trends likely to slow growth in the current quarter are still good for consumers. The warm winter weather will likely mean Americans won’t have to spend as much to heat their homes. But that technically will lower the economy’s growth rate.

The economy was held back in the fourth quarter by a big drop in government defense spending. Defense spending is unlikely to be much of a factor in the current quarter, economists say.

Growth could be slowed or even derailed this year by rising gas prices, which have jumped 30 cents in the past month. That forces consumers to spend more for the same amount of gas and leaves less money for other purchases. A sharp rise in gas prices early last year choked off growth after companies began the year with a burst of hiring.

But so far, the increase isn’t enough to cause a repeat of last year’s disappointment, economists say. With hiring accelerating and incomes higher, consumers are better able to afford higher prices at the pump.

And the prices of other goods also jumped last year, particularly food, as well as other energy sources such as natural gas. But natural gas costs have plummeted recently while food prices are rising at a much slower pace. Those trends should offset some of the squeeze on spending from pricier gas.

The government makes three estimates of the gross domestic product for each quarter. The GDP is the economy’s total output of goods and services and includes everything from autos to utility output to haircuts. Each revision is based on more complete economic data.

Christohper S. Rugaber, Detroit News