The US economy grew at a weaker-than-expected 3.1% annual pace in the final quarter last year, its slowest since the beginning of 2003, a government report showed.

The increase in fourth-quarter gross domestic product was down from a four percent gain in the third quarter and also was below Wall Street economists’ forecasts for a 3.5% rate of fourth-quarter expansion.

The Commerce Department report showed exports of goods and services fell at the steepest rate in two years during the October-December fourth quarter while imports rose.

US employment costs rose a slightly less-than-expected 0.7% in the fourth quarter of 2004, as salaries and wages grew at their slowest rate in nearly six years, a government report showed. Wall Street had forecast the Employment Cost Index to rise 0.9% between October and December.


o According to Michael Woolfolk, Senior Currency Strategist, Bank of New York:

“A very disappointing number, particularly in light of strong consumer spending over the period. Much disappointment is directed at net exports, which subtracted much more significantly from the headline number than anticipated. It shows the economy has returned to the long-term trend growth rate of 3.1%, the average over the last several decades, as higher interest rates and higher energy prices have an affect.”

o According to Richard Dekaser, Chief Economist, National City Corp., Cleveland:

“The big story here is foreign trade. Real growth in domestic purchases is up 4.7%. We lost 1.6% in GDP on foreign trades. It’s the disappointment of 2004.

Part of explanation is that the US was undergoing restocking of inventory especially in petroleum. We had strong growth in the first half and the middle of the year, and the hurricanes affected also oil stocks.

These latest numbers confirmed other measures of inflation.

We are now experiencing an underlying rate of inflation, right in the middle to the upper end of the Fed’s comfort zone. I can be safely that the deflation worries of a year ago is dead and buried.”

o According to David Resler, Chief Economist, Nomura Securities International, New York:

“I haven’t seen all of the figures but my suspicion is that trade is the big culprit here. It probably reduced GDP by 1-1/4 percent or so. GDP is the slowest since the first quarter of 2003. The important thing about this is that it completes a 5-quarter period in which it has given us the narrowest range of GDP growth in US history. We have been in a very tight band, the average is about 3.8%. It is important to understand just how stable things are.”

o According to Patrick Fearon, Economist, A.G. Edwards & Sons, St. Louis, Missouri

“It was a little bit weaker than expected. We were showing consensus expectations of 3.5% growth, but the thing to keep in mind is that 3.1% is right at the long-term average growth rate. So even though it was a little less than people had hoped for, there’s certainly nothing really negative about the number. It looks the slowdown in significant part came from a modest slowdown in personal consumption expenditures, and international trade also seems to have been a bit of a drag.”

o According to Elisabeth Denison, Economist, Dresdner Kleinwort Wasserstein, New York

“Net exports subtracted 1.7% from GDP in the fourth quarter, much bigger than we had expected. It’s a pattern that is worrying especially with the big imbalances we are seeing in the current account. We are importing more foreign goods and not exporting as much. This doesn’t bode well for hopes that the current account will strengthen in 2005. The PCE excluding food and energy is not yet at a rate that would make the Fed worry.”

Market reaction:

o US Treasury debt prices rally on lower-than-expected GDP, ECI index. The benchmark 10-year Treasury note was up 13/32 to yield 4.17%.

o The euro surges against the dollar, trading at $1.3076 so on after the report from about $1.3025 shortly prior. The dollar fell against the yen, trading at about ‘103.12 from about ‘103.4