GDP Grows, Unexpectedly, And The Fed Holds

ByJohn S. McClenahen Confounding the majority of economic forecasters and adding credence to the minority projecting a short and shallow recession, U.S. GDP grew in the final quarter of 2001. Growth was very small, just 0.2% at an annual rate, but nevertheless positive, reveal advance data from the U.S. Commerce Department's Bureau of Economic Analysis. Increased spending by consumers and government more than offset the negative effects of business inventory workdowns and lower spending on buildings and other kinds of nonresidential fixed investments. For the year 2001, nominal U.S. GDP stood at $10.198 trillion and inflation-adjusted GDP at $9.326 trillion. "We believe demand will falter in the current quarter, but less inventory liquidation will keep growth positive," says Gerald Cohen, a senior economist at Merrill Lynch & Co., New York. More cautious, however, is David Huether, chief economist at the National Association. of Manufacturers, Washington. The data mask troubles in exports and investment, he asserts. "First, there will likely be a major retrenchment in consumer spending early in 2002 since most of the auto purchases last quarter were borrowed from the future," Huether states. "Second, continued weak growth abroad and the strong [U.S.] dollar will continue to hamper exporters. Third, without an investment-led stimulus package, capital spending will likely make a gradual recovery." Meanwhile, the Federal Open Market Committee (FOMC), the Federal Reserve panel that sets U.S. short-term interest rates, has left the federal funds rate unchanged at 1.75%. "Signs that weakness in demand is abating and economic activity is beginning to firm have become more prevalent," the FOMC said on Jan. 30 at the close of a two-day meeting in Washington. "With the forces restraining the economy starting to diminish, and with the long-term prospects for productivity growth remaining favorable and monetary policy accommodative, the outlook for recovery has become more promising." However, with the prospects for increased capital spending by business and continued consumer spending uncertain, the FOMC is hedging its bets. The FOMC said it was keeping open the possibility of additional interest-rate cuts.