Unsold goods weigh on future growth

By John W. Schoen, Senior Producer

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The U.S. economy perked up late last year as hiring accelerated?and factories ramped up production.?Unfortunately, a lot of what those factories made is still sitting in warehouses and on store shelves.

That doesn?t bode well for growth in the coming months. ?

At first blush, the numbers posted by the Commerce Department for gross domestic product in the last three months of 2011 looked strong. Overall growth advanced by 2.8 percent on an annual basis, a little weaker than economists had expected based on a series of other positive economic reports. That was much better than the 1.8 percent pace in the third quarter and the best showing since the second quarter of 2010.

But much of the fourth quarter growth came from businesses restocking inventories, which swelled by $56.0 billion, adding nearly 2 percentage points to GDP growth. The so-called ?final sales? number, which tracks how much was actually sold, rose a meager 0.8 percent.

?The pickup in GDP growth doesn't look half as good when you realize that most of it was due to inventory accumulation," said Paul Ashworth, chief U.S. economist at Capital Economics. ?Despite the apparent improvement in some of the incoming economic data, it still looks like ... another disappointing year."

Ashworth is among a number of private economists who see the fourth quarter growth spurt easing this year. He expects to see U.S. GDP advance by just 1.5 percent in 2012.

Federal Reserve officials echoed that prediction this week, though they?re?a bit more optimistic. The central bank is looking for growth of 2.7 percent in 2012, but the latest forecast was trimmed by two-tenths of a percentage point. The Fed expects unemployment to drop as low as 8.2 percent by the end of the year.

Vote: Will the economy continue to accelerate?

The lowered growth forecast prompted central bankers to extend their pledge to keep interest rates at or near zero for another year; they now expect to hold rates at rock bottom until at least 2014 to try to encourage businesses and consumers to borrow and spend more money.

Business investment slowed sharply in the fourth quarter after heavy spending earlier last year.

Consumers continued to do their part; consumer spending grew at a 2 percent annual rate, up a bit from the third quarter. Car sales zoomed ahead as the average age of the cars and light trucks on the road hit record levels. The replacement of those worn-out vehicles helped boost car sales by 14.8 percent.

Consumers are feeling a bit better about the outlook for the economy. A separate report Friday showed the University of Michigan consumer sentiment index edging up for the fourth straight month. But the level of confidence remains weak.

?Despite the rise, this and other confidence measures remain in recession territory due to global sovereign debt fear, Congressional dysfunction, and high food and energy prices,? said economist Mike Englund at Action Economics

Consumers have also fallen back on car loans and credit cards to maintain their spending.?Consumer borrowing jumped by $20.4 billion in November, the Federal Reserve said Monday. That was the third straight increase and the largest monthly gain in a decade. Consumers have boosted borrowing in 13 of the past 14 months.

The gradual improvement in the job market may explain some of the rise in borrowing. But many households are also leaning harder on debt because their wages are rising as fast as the price of the goods and services they need to buy.

A breakdown of the fourth quarter GDP numbers, with Mark Olson, Treliant Risk Advisors co-chairman/former Fed governor; CNBC's Steve Liesman & Rick Santelli

Personal incomes rose at an 0.8 percent annual rate, according to Friday?s GDP report, after falling for the last two quarters. Consumer prices are climbing at an annual rate of 3 percent, according to the latest government data.

Much of that spending appears to represent people buying goods, not services. That's a sign that households are sticking to necessities, according to Joel Naroff, chief economist at Naroff Economic Advisors.

?The clearest sign that households remain cautious was in services spending,? he said. ?This is the largest component of consumer demand and it fairly budged.? People are not yet comfortable buying the little luxuries in life.?

With consumers tapped out and cautious, the economy faces other headwinds in the coming year. The housing industry remains stuck in the worst recession since the 1930s. A separate report Friday showed that the pace of new home sales fell in December, making 2011 the worst sales year since the Commerce Department first began collecting the data in 1963. Sales in December fell to a seasonally adjusted annual pace of 307,000 ? less than half the 700,000 that economists say represents a healthy pace.

Slack sales have forced builders to slash prices, which has kept many would-be buyers on the fence until they see signs that the market has bottomed. The median sales prices for new homes dropped in December by 2.5 percent to $210,300.

Though ultra-low mortgage rates have made home buying more affordable than it has been in decades, mortgage bankers remain very choosy about to whom they?ll lend. Some 12 million potential ?move-up? buyers are stuck with mortgages that are bigger than their homes are worth.

Growth in the fourth quarter was also held back by big cuts in government spending, which lopped 0.9 percent from fourth-quarter GDP.? That belt-tightening will likely continue.

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Source: http://bottomline.msnbc.msn.com/_news/2012/01/27/10251908-unsold-goods-weigh-on-future-economic-growth

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