Economy nearly stalled in 4th quarter

WASHINGTON - The economy nearly stalled in the fourth quarter with a growth rate of just 0.6 percent, capping its worst year since 2002.

Wednesday's Commerce Department report showed that the economy deteriorated considerably during the October-to-December quarter as worsening problems in the housing market and harder-to-get credit made individuals and businesses more cautious in their spending. Fears of a recession have grown, even as inflation remained elevated.

For all of 2007, the economy grew by just 2.2 percent, the weakest performance in five years, when the country was struggling to recover from the 2001 recession. The housing collapse was the biggest culprit; builders slashed spending on housing projects by 16.9 percent on an annualized basis, the most in 25 years.

The gross domestic product report for the last quarter of 2007 came as the Democratic-run Congress and the Bush administration continued to work on a program of tax rebates and business incentives.

"We are not happy with 0.6 percent GDP growth," Commerce Secretary Carlos Gutierrez told The Associated Press. "We now need the full Congress to move forward as soon as possible because consumers — the American people — are waiting for that check and that is going to help them."

Sen. Charles Schumer, D-N.Y., said when economic growth slowed as much as it did in the final quarter "alarm bells should be going off urging Washington to give the economy a good shot in the arm."

To help bolster the economy, the Federal Reserve on Wednesday sliced a key interest rate by a bold half-percentage point, its second reduction in eight days.

Wall Street rallied but then pulled back, still wary. The Dow Jones industrials jumped more than 200 points after the Fed announcement but finished the day down 37.47.

The fourth-quarter's performance was much weaker — half the pace that economists were expecting.

"The economy has been subject to something of the perfect storm here. It has been hit by the housing slump the credit squeeze, the subprime slime and stock price declines on Wall Street," said economist Ken Mayland, president of ClearView Economics. "The economy is weathering some pretty stormy seas but it is weak."

The 0.6 percent annualized increase in gross domestic product (GDP) marked a big loss of momentum from the third quarter's brisk, 4.9 percent showing. The fourth-quarter pace was the slowest since the first quarter of last year.

The GDP figures come as worries mount that the country is on the verge of a recession or perhaps is already sliding into one.

The administration remained hopeful that a recession could be skirted.

"We are not forecasting a recession," White House spokesman Tony Fratto said. Gutierrez said: "We are looking at slower growth, and the indicators — the facts, the numbers we have at out disposal — suggest that is what we will see" for the first half of the year, the commerce secretary said. He said the economy should return to a more solid growth rate in the second half.

GDP measures the value of all goods and services produced within the United States and is the best barometer of the country's economic health.

In the fourth quarter, consumer spending slowed to a pace of 2 percent, down from a 2.8 percent growth rate in the prior quarter. For all of last year, consumers boosted spending by 2.9 percent, the smallest increase since 2003.

Businesses also watched their spending more closely during the final quarter of last year. Fearing a lessening appetite from their customers, they cut inventories of goods. That shaved 1.25 percentage points from fourth-quarter GDP, the most in a year.

Spending by businesses on equipment and software slowed to a pace of 3.8 percent in the fourth quarter. For the year, such spending was up just 1.4 percent, the worst showing since 2002.

Sales of U.S. goods and services abroad also slowed sharply in the fourth quarter. Exports grew at a 3.9 percent pace, compared with a sizzling 19.1 percent growth rate in the third quarter. That strong export growth was a key reason why the economy performed so well as a whole in the prior quarter. For all of 2007, exports grew by 7.9 percent, the slowest in two years.

Meanwhile, inflation picked up sharply during the final quarter. However, for all of 2007, it moderated slightly.

A gauge of inflation linked to the GDP report showed that "core" prices — excluding food and energy — grew at a rate of 2.7 percent in the fourth quarter. That was up from a 2 percent rate in the prior quarter and was the biggest quarterly increase since the spring of 2006.

For all of last year, core prices went up 2.1 percent, down from 2.2 percent in 2006. The inflation figures are above the Fed's comfort zone — the upper bound of which is a 2 percent inflation rate.

The pick up prices could complicate the Fed's job of trying to energize overall economic growth while also keeping inflation under control.

Some analysts think the economy is on pace to recede from January through March. Under one rough rule, the economy would have to contract for six months in a row for the country to be considered in a recession. The odds of a recession have risen sharply over the last year, and analysts increasingly believe the U.S. will be in one during the first half of this year.