The US economy grew at a stronger-than-expected pace in the final quarter of last year, boosted by robust spending and slowing inflation that more than offset the biggest decline in housing activity in 15 years, a government report on Wednesday showed.
Gross domestic product, the broadest measure of overall economic activity within US borders, expanded at a 3.5 percent annual rate during the October-through-December quarter, the Commerce Department reported, the biggest gain since the first quarter of last year.
The strong reading on the final quarter of last year is the last piece of key data Federal Reserve policy-makers will weigh at their meeting on Wednesday. Economists are expecting the central bank will keep interest rates unchanged.
On the inflation front, the closely watched personal consumption expenditures price index fell at a 0.8 percent rate in the quarter, the biggest decline since the third quarter of 1954 when it dropped 1.2 percent. The quarterly decline reflected a huge drop in energy prices, a department official said, and was substantially lower than the 1.9 percent advance Wall Street economists were expecting. That was also the first decline in this index since a 0.1 percent decrease in second quarter of 1961.
Excluding volatile food and energy prices, the core PCE index was up 2.1 percent, still slightly above the Fed's assumed comfort range of 1 percent to 2 percent but lower than the 2.2 percent gain in the third quarter of 2006. Economists were expecting the core PCE index to advance 2.2 percent. For the year, GDP advanced 3.4 percent after a 3.2 percent gain in 2005.
The government's first take on the economy's health during the fourth quarter was better than expected. Economists polled by Reuters ahead of the report were expecting GDP to expand a 3.0 percent annual pace. Still, motor vehicle output restrained GDP sharply. Excluding motor vehicle production, GDP would have been up at a4.8 percent rate during the quarter.
Spending on new home building declined at a 19.2 percent rate during the quarter, as the housing market continued to weaken. That was the biggest decline since a 21.7 percent decrease in the first three months of 1991. For the year, residential spending was down 4.2 percent, also the biggest decrease since 1991. During the fourth quarter, personal spending advanced by a healthy 4.4 percent rate, the best showing since the first quarter of last year.
EMPLOYMENT COSTS RISE SLIGHTLY: A separate Labour Department report showed that employment costs - another piece of the economy's pie that inflation-wary Fed officials are watching - rose a less-than-expected 0.8 percent in the fourth quarter.
The increase in the Employment Cost Index, a broad gauge of what employers pay in wages and benefits, eased from the third quarter's 1.0 percent gain and was below the 1.0 percent rise economists had forecast, Labour Department data showed.
A separate report showed applications for US home mortgages increased last week, with both purchasing and refinancing activity picking up. The Mortgage Bankers Association said its index of mortgage application activity rose 3.2 percent to 631.1 in the week ended January 26 after dropping 8.4 percent the previous week. The index is 0.7 percent higher than a year earlier.
A third report showed US private employers likely added 152,000 new jobs in January, suggesting a bit more labour-market strength than Wall Street economists had expected. The report from ADP Employer Services, which draws on payroll data the firm has processed, comes two days ahead of a key monthly government report on the labour market. A Reuters poll last week found economists expect US nonfarm employers, including the government, added a total of 149,000 workers to their payrolls in January.