4Q GDP up 1.4%
Economy grew at faster pace than first thought; jobless claims, Chicago PMI up.
February 28, 2002: 4:27 p.m. ET
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NEW YORK (CNN/Money) - The U.S. economy grew much faster in the fourth quarter than initially thought, the government said Thursday, bolstered by robust consumer and government spending.
In its second estimate of fourth-quarter gross domestic product (GDP), the Commerce Department said the broadest measure of economic strength grew an estimated 1.4 percent.
The number, which will be revised again next month, was better than the 0.2 percent growth initially estimated and the 0.9 percent growth expected by economists surveyed by Briefing.com. It also indicates that a technical recession, defined as two straight quarters of shrinking GDP, may have been avoided.
"The economy is doing better than anyone three or four months ago thought it could do," said Merrill Lynch chief economist Bruce Steinberg. "While 1.4 percent growth is pretty feeble, it does mean the recession was, from a GDP perspective, the mildest one we ever had."
"And the signs since the fourth quarter suggest growth picking up in the first quarter more strongly than most people had anticipated," Steinberg added. "So I would say the recovery is here."
The government attributed the change in its GDP estimate to a downward revision to imports, which subtract from GDP, and an upward revision to personal spending on non-durable goods. For the full year 2001, GDP grew just 1.2 percent, the worst performance since a 0.5 percent decline in 1991, during the last recession.
Separately, the Labor Department said the number of Americans filing new claims for unemployment benefits rose to 378,000 in the week ended Feb. 23 from a revised 361,000 the preceding week. Economists surveyed by Briefing.com expected 385,000 new claims last week.
The four-week moving average, which smoothes out fluctuations in the weekly data, fell to 373,000 last week from a revised 376,250 the prior week.
And continued claims, the number of people who have been out of work for a week or more, rose to 3.49 million in the week ended Feb. 9, the latest week for which data are available, from a revised 3.43 million in the prior week.
In a more encouraging sign of the economy's strength, the Chicago Purchasing Managers Association's index of Midwestern manufacturing activity jumped to 53.1 in February from 45.1 in January. Economists surveyed by Briefing.com expected Chicago PMI of only 47.0.
A PMI number above 50.0 indicates expansion, and February's growth was the first in a year and a half. It raises the bar for Friday's report from the Institute of Supply Management on national manufacturing in February. The long-suffering sector has been in a recession for 18 months.
Stocks rose on Wall Street after the GDP revision and PMI data were announced, but lost steam as the day progressed. Both the Dow Jones industrial average and Nasdaq composite index fell on the day, although the Dow finished February with a 2 percent net gain for the month. The Nasdaq lost nearly 11 percent in February, its worst month since September. Treasury bond prices also fell.
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In an effort to keep consumers spending despite mounting job cuts and a recession that some economists think began in March 2001, the Federal Reserve cut its target for short-term interest rates 11 times last year.
Economists are divided about the timing and pace of the economy's recovery from its first recession in a decade, but a recent survey of 37 economists by the National Association of Business Economists found that many agreed the recession may already be over.
But unemployment, which is a lagging indicator and continues to rise even as the economy recovers, could be a drag on consumer spending, as could high levels of consumer debt, the possibility that the red-hot housing market has to cool off sometime and the lingering fears about corporate accounting raised by the collapse of Enron Corp.
Also, a slump in business spending, which started the broader downturn, has yet to end. When businesses stopped buying new equipment after the boom of the late 1990s, manufacturing went into a prolonged recession and more than a million jobs were lost.
Companies have successfully unloaded their backlog of unsold goods, dropping $120 billion in the fourth quarter alone. That sets the stage for a pick-up in production and spending on new equipment, but demand has to improve first.
Business spending on building and equipment fell 13.1 percent in the fourth quarter, the fourth straight decline. The bulk of that drop came from a 32.6 percent plunge in spending on buildings. More encouragingly, spending on computers and other equipment fell only 4.8 percent, the lightest drop since the first quarter of 2001.
Despite the risks, the Fed decided to leave rates alone after its policy meeting in January; and Fed Chairman Alan Greenspan told Congress on Wednesday that he thought a modest recovery was likely on the way.
Greenspan also said Fed policymakers expect moderate economic growth this year of between 2.5 and 3.0 percent. Some economists, though, expect such a pace to come as soon as the first quarter; and the stronger-than-expected fourth-quarter performance seemed to reinforce that view.
"We're now looking at a 3 percent first quarter on top of that 1.4 percent fourth quarter," David Wyss, chief economist at Standard & Poor's, told CNNfn's Before Hours program. "We've been the optimists, and I haven't been optimistic enough."
The Fed's efforts seemed to be effective, as consumer spending rose an estimated 6.0 percent in the fourth quarter, according to the Commerce Department, after rising just 1.0 percent in the third quarter. Consumer spending is the engine of the U.S. economy, making up $6.5 trillion of the $9.3 trillion total GDP.
Government spending jumped 10.1 percent in the quarter, boosted by the war in Afghanistan and other efforts in the wake of the Sept. 11 terrorist attacks.
Imports, which subtract from GDP, fell 6.9 percent in the quarter, while exports, which add to GDP, fell 12.2 percent.
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