Mkt hangover from yesterday. I thought all the smarteez would...

Mkt hangover from yesterday. I thought all the smarteez would have piut the DOW today.

U.S. economy slows to below trend
By Rex Nutting, MarketWatch
Last Update: 3:16 PM ET Jan. 16, 2006


WASHINGTON (MarketWatch) - The U.S. economy grew at the slowest pace in nearly three years in the just-concluded fourth quarter, economists estimate.


Led by what could be the weakest consumer spending since 1991, the economy likely grew at about a 2.7% annual pace in the fourth quarter after 11 straight quarters of growth above 3%, economists say.

The slowdown is just what the Federal Reserve wants at this point in the business cycle. The Fed has boosted its short-term interest rate target 13 times since mid-2004 in a bid to put the brakes on the economy.

Above-trend growth has been sopping up excess capacity in the economy and leading to shortages and bottlenecks that can fuel inflation.

The Fed is expected to raise rates again on Jan. 31 and likely in March.

Few economists expect the slump to worsen significantly. For the first quarter, economists are estimating growth at 3.6%, approximately the economy's long-term potential. Most economists do see growth slowing again at the end of the year as the housing market weakens.

"The economy could get back to an above-trend rate this quarter, and that is what will matter to monetary policy makers," said Joseph LaVorgna, chief U.S. fixed income economist for Deutsche Bank.

While most economists had forecast a modest slowing in the fourth quarter, it looks as if the slump was worse than expected. At the beginning of the quarter, economists were expecting growth of about 3.2%.

Consumer spending, business investment and government spending all underperformed relative to expectations. The collapse of auto sales likely subtracted a full percentage from growth, UBS economists said.

Housing was one of the few bright spots in the fourth quarter's growth mix, along with inventory rebuilding.

"We do not believe the apparent weakness in the fourth quarter represents a clear change in the trend," said James O'Sullivan, an economist for UBS. GDP will likely slow from about 3.6% in 2005 to 3% in 2006 and 2.7% in 2007, he said.

The course of consumer spending this year is very much an open question. Some economists, such as Ian Shepherdson of High Frequency Economics, believe a sharp slowdown in housing later this year will force consumers to rein in their spending.

It's possible that consumer spending outpaced consumer's disposable incomes in 2006 for the first time since the Great Depression.

Paul Kasriel, top economist for Northern Trust, figures that $2.5 trillion of outstanding household debt will reprice at a higher interest rate this year, forcing households to devote more of their paycheck to servicing their mortgage and credit card bills.

But other economists say consumer spending will be fine this year. Household income growth should be strong enough to maintain healthy spending.

"We expect consumer spending growth to remain solid this year even as the housing market slows," said Dean Maki, economist with Barclays Capital. Most of the wealth that households extracted from their home equity was used to pay down more expensive debt, not to fund current consumption, Maki said. That would make consumer spending less vulnerable if home prices fall.

Rex Nutting is Washington bureau chief of MarketWatch.