Economic Growth Comes to a Halt in Fourth Quarter
Gross Domestic Product (GDP) rose at annual rate of 1.1% in the final quarter of 2005. This was well below consensus estimates of 3% growth and the weak number raises concerns about the direction of the U.S. economy. Slow automobile sales and lower than expected inventory growth provided the biggest drags on economic growth during the latest quarter. Financial Watch expects GDP to be revised slightly upward during the coming months as the Commerce Department works through typical revisions as more data is made available. Corporate earnings have come mostly in line with expectations and revenue figures do not indicate any signs of slow growth. Lingering impacts from hurricanes Katrina and Rita clearly put a dent into growth. Rebuilding in the first half of 2006 should provide a modest boost to economic growth and we continue to believe the U.S. economy will grow by slightly more than 3% in the current year. The biggest positive coming out of this quarter’s GDP figures is a strong increase in disposable incomes. With more money in their pocketbooks consumers should be able to reaccelerate consumption growth in the coming quarter, which will hopefully offset the negative impact of a slowing housing market.
Next week Alan Greenspan will raise interest rates by 25 basis points during his last meeting as chairman of the Federal Reserve. Today’s report raises concerns about the pace of the U.S. economy moving forward. Financial Watch hopes next week marks the end of the Fed’s tightening cycle. Despite slower growth, inflation moved higher during the latest quarter. We believe most of the inflation occurred early in the fourth quarter as higher costs were associated with Hurricane Katrina. The oil market remains volatile in the face of Iran’s potential clash with the west and this may force Ben Bernanke to think twice before pausing. We expect a slight change in the Fed’s statement next week to place more emphasis on future monetary direction being decided after considering incoming data. This would grant Ben Bernanke latitude to decide the direction of future interest rates.