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By Michael E. Kanell
Atlanta Journal-Constitution
Thursday, February 1st, 2007
The economy plowed through the lagging housing market like a ship through choppy seas during the fourth quarter, racking up surprisingly solid 3.5 percent growth, the government reported Wednesday.
With home buying sluggish, residential construction spending plunged at a 19.2 percent rate during the quarter, while commercial construction slipped, too. Yet the economy got a stronger-than-expected push from consumers, government and exports.
What was not a surprise was the reaction at the Federal Reserve.
With growth decent but not overheated and core inflation — excluding food and energy — at 2.1 percentonly slightly above the Fed's comfort zone, the central bank's elite committee voted unanimously to leave short-term interest rates right where they are.
At least for now, Wednesday's report from the Bureau of Economic Analysis seemed to vindicate the Fed's long insistence that the economy does not need lower rates to expand.
Despite a weak spot in late summer — and fears of housing's drag — gross domestic product expanded by 3.4 percent during the year, the bureau reported.
"What you are seeing is that the economy is very broad — there isn't just one sector driving the economy," said Owen Malcolm, vice president of Sanders Financial Management in Norcross. "It was a great report — there's almost no negative to it."
While the GDP data are subject to revision, the initial report showed strong tailwinds pushing toward faster growth:
• Consumption grew at a 4.4 percent rate. That alone accounted for more than half of economic growth during the quarter, said Dean Baker, co-director of the Center for Economic and Policy Research.
• Government spending surged ahead at a 3.7 percent clip — mostly because of military spending.
• Exports breezed ahead at a 10 percent pace, while imports dipped for the first time in three years.
All this in a year dominated by the burst of a housing bubble, higher interest rates and rising energy prices.
"What's really remarkable about the economy's performance last year is that it successfully dodged so many bullets," said Bernard Baumohl, managing director of the Princeton, N.J.-based Economic Outlook Group, in an e-mail to clients.
Not that there are no dangers ahead. Growth is projected to be slower this year than last: 2.1 percent expansion, predicts Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University.
Growth after the 2001 recession largely relied on an unprecedented boom in housing. Sales, prices and building surged, while homeowners traded equity for billions of dollars in cash.
So when housing started its steep slide, some economists warned that the rest of the economy had to follow. Even optimists warn that millions of jobs and billions in consumer spending are still tied to real estate.
"As long as people continue to have jobs and continue to get paid, they are likely to keep spending money," said Jack Caffrey, vice president and equity strategist for JPMorgan Private Bank. "But we probably haven't seen the full impact of the slowdown."
In its efforts to tune the economy, the Fed cannot control long-term rates, like mortgage rates. But its benchmark rate, left unchanged at 5.25 percent since June, is used to determine rates for credit cards, home equity and other loans, and some introductory — or "teaser" — mortgage rates.
Higher rates usually slow the economy by adding to the cost of borrowing for both consumers and companies. Rate cuts generally spur spending and growth. But faster expansion typically raises the chances of inflation — treated by the Fed as economic enemy No. 1.
Federal Reserve officials had to feel somewhat vindicated by the GDP report. After stubbornly resisting calls from pessimists for rate cuts, the Fed maintained that expansion is healthy with the greater threat coming from inflation.
In a statement announcing its decision Wednesday to leave rates unchanged, the Fed argued that most of the nation's factories, offices and workers are in use.
That means less slack, which makes it more likely that companies will have to spend more to find what they need, the Fed said.
"The committee judges that some inflation risks remain," the statement said.
But if inflation is a problem, it is not because most American workers are doing well, argued Jared Bernstein, senior economist for the Economics Policy Institute.
Wages, which lost ground to inflation for several years, have only sporadically kept pace with higher costs. The biggest boost to compensation has come in benefits — mainly health care.
Compensation growth during the fourth quarter grew 0.8 percent, slower than earlier in the year and "providing no evidence of acceleration in labor costs," he said.
"The benefits of the 5-year-old expansion have largely flowed to profits, and neither to wages nor benefits," Bernstein said.
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