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Economy Hits the Brakes

Fourth-quarter GDP growth is just 1.1%, badly missing estimates.
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Updated from 8:41 a.m. EST

The U.S. economy hit a wall in the fourth quarter, with an initial reading on gross domestic product showing annualized growth of just 1.1%, according to the Commerce Department. Weak spending in the wake of Hurricane Katrina was the main culprit.

The government's main gauge of broad economic output was expected to rise by 2.8% in the quarter after jumping 4.1% in July through September. The worse-than-expected performance changes the outlook for the

Federal Reserve

, whose 13 straight interest rate hikes appear finally to be restraining growth.

The Fed next meets on Tuesday and is widely expected to raise its fed funds lever by another quarter point to 4.5%. The central bank's first meeting under chairman designee Ben Bernanke will be in March. After the report, fed funds futures showed odds of a quarter-point hike at that meeting falling to 60% from 76%, according to Miller Tabak data.

Stock futures fell on the news, with the

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S&P 500

going from 5 points above fair value to 2 points above. The 10-year Treasury bond held steady with a 4.5% yield.

Growth in the fourth quarter was the slowest since the fourth quarter of 2002. It's the first sub-3% reading in 10 quarters.

Two readings on inflation contained in the report suggest that inflation remains a concern. The personal consumption index rose 2.6%, while the chain-weighted GDP price index rose 3%. Both were higher than expected.

Consumer spending rose just 1.1% in the fourth quarter, according to the report, down from 4.1% in the third quarter. Fixed business investment rose 2.8%, down from 8.5% in the previous three months.

The weak consumer reading reflected a 17.5% swoon in spending on durable goods during the quarter. Poor auto sales were to blame. In the third quarter, durable goods orders rose 9.3%.

Economists expect growth to revive in the current quarter. The consensus GDP outlook is currently in the plus 3.8% range.