Share this article

print logo

Economy grows at rate of 3.2% ; Increase attributed to consumer spending

The economic recovery is consistently picking up speed, and American consumers are pushing the gas pedal, increasing their spending late last year at the fastest pace since 2006.

But can they spend enough this year to make the economy grow even faster and finally bring down unemployment? They must shoulder that burden because the housing market and government spending aren't offering much help.

Friday, the Commerce Department listed a more active consumer as the main reason the economy grew at an annual rate of 3.2 percent in the final three months of last year, up from2.6 percent the previous quarter and the best since the start of last year.

That level of growth would be great news in a healthy economy that needed only to hold steady.

But 1 1/2 years after the Great Recession, unemployment still is 9.4 percent. By some estimates, the economy would need to grow 5 percent for a whole year to significantly bring down the unemployment rate.

Still, the recovery has picked up steam since a difficult patch last spring. Economists now think this will be a pivotal year when consumers finally can be counted on to power the economy to stronger growth.

A big reason, economists say, is the one-year cut of 2 percentage points in the Social Security payroll tax, expected to keep Americans spending enough so that the economy will grow more strongly this year.

"Consumers are the most powerful cylinder the economy has, and finally it is firing," said Sung Won Sohn, an economist at California State University. "Consumers will be picking up the slack this year as the government stimulus fades."

After the recession ended, Americans became cautious about spending. That changed at the end of last year. They increased spending by a 4.4 percent annual rate from October to December, including holiday splurges on furniture, appliances, cars and clothes.

The stock market also is at its highest point since mid-2008, and unemployment has come down from its post-recession peak. Both factors could make people feel more comfortable about spending.

Economists project consumer spending will rise 3.2 percent or more for all of this year, almost double last year's rate. Consumer spending accounts for roughly 70 percent of overall economic activity.

"At this point, it looks like consumers will finally be full-fledged contributors to the economy's growth," said Jim O'Sullivan, an economist at MF Global.

The recovery, however, has a tough road ahead. Economists surveyed by the Associated Press predict the unemployment rate will rise to 9.5 percent in this month and fall only to 8.9 percent by the end of this year.

For all of last year, the economy grew 2.9 percent, the most since 2005. In 2009, the economy had suffered its worst contraction since World War II. All told, the economy produced about $13.4 trillion worth of goods and services last year, a record.

In a separate report, the Labor Department said wages and benefits rose 2 percent last year, the second-smallest increase in nearly three decades and only marginally better than 2009. Even though employers are expected to hire more this year, they have little incentive to pay more because competition for jobs is so fierce.

And with their paychecks growing only marginally, Americans are saving less. The savings rate dropped to 5.4 percent from 5.9 percent in the previous quarter. Economists predict people will save even less this year.

The economy depends heavily on consumer spending because federal stimulus aid is fading and many businesses are spending less money to replenish their stockpiles.

Businesses spent about$7 billion on inventories in the last three months of the year. That's far less than the $121 billion spent in the three previous months, when factories were boosting production of goods for businesses that had let their stockpiles shrink. From October through December, that manufacturing output slowed. In fact, it subtracted from growth instead of adding to it, leaving consumers to pick up the slack.

Exports grew faster in the last three months of the year and are expected to rise even more this year, helping the economy. Economists also expect double-digit growth in spending on equipment and software by businesses. Tax breaks included in the compromise reached between President Obama and Republicans late last year will leave companies with money to spend.

Spending on home building rose at the end of last year, after a sharp cut in the previous quarter. Usually housing construction is a big contributor to growth after recessions as low interest rates spur buyers. But in this recovery, credit is hard to get. And consumers are still wary of making major financial commitments.

"After worries last year that the economy might be stalling, we turned a corner," said Mark Zandi, chief economist at Moody's Analytics. "I think we will have a self-sustaining economic expansion in 2011."

Government spending stopped being a source of growth for the economy at the end of last year.

It dipped 0.6 percent in the October-to-December quarter, the first drop since the start of last year.

There are no comments - be the first to comment