Fears of a double-dip recession in the United States are fading, but slower-than-expected growth at the end of 2011 highlights why the Federal Reserve might leave its patient in intensive care for at least another three years.
The world's biggest economy grew at a 2.8-per cent annual pace from October to December, the U.S. Commerce Department said Friday, after a 1.8-per cent clip in the previous three-month period. But even though the fourth-quarter increase in U.S. gross domestic product was the fastest since mid-2010, Wall Street economists were hoping for a 3-per-cent rate. And without a big gain in company inventories that might not be sustained, GDP rose just 0.8 per cent.
Fed Reserve chairman Ben Bernanke and his officials signalled this week that they will leave their main interest rate near zero through the end of 2014, indicating that a slew of positive data has not persuaded them Canada's No. 1 export market is out of the woods.
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Friday's report backs up the Fed's skeptical approach, economists said. Most believe it will take many quarters of faster growth to meaningfully reduce the 8.5-per cent U.S. unemployment rate, even if a new recession seems less likely.
The European debt drama that has made forecasting exceptionally tricky in recent months still threatens to worsen and, as the International Monetary Fund warned this week, tip the United States and the rest of the global economy into a fresh downturn.
"There is still a lot of uncertainty around what's going to happen in the first quarter," said Jennifer Lee, vice-president of economic research at BMO Nesbitt Burns in Toronto. "We can't assume anything at this point."
While the bulk of that uncertainty, for the United States and for economies from Canada to China, is linked to Europe and its vanishing demand for exports, there are home-grown questions, too.
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U.S. consumer spending, which makes up almost 70 per cent of the economy, rose 2 per cent in the fourth quarter, little more than the previous period's 1.7-per cent gain, even though slowing inflation meant Americans had more purchasing power by the end of last year.
And a drop in the U.S. savings rate suggests consumers tapped into savings to spend instead, reflecting stagnant wage growth; the savings rate is now at the lowest level since 2007.
Business investment on items such as equipment and software rose at a 5.2-per-cent annual pace and there are signs that such purchases will continue to climb. Still, the fourth-quarter pace was much slower than the 16-per-cent drop recorded from July to September; some analysts said the slowdown suggests fears about Europe are causing some executives to delay decisions.
Government spending fell at a 4.6-per-cent annual pace, capping the biggest annual drop since 1971 – and that's before the fiscal belt-tightening expected over the next two years. And while U.S. residential construction climbed at an 11-per-cent annual rate, a welcome sign that the housing industry is finally starting to level off, the real estate market remains in a deep funk.
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William Dudley, president of the Fed's regional bank in New York, said in a speech Friday that the pace of growth late last year is unlikely to be matched in the first half of 2012, amid risks such as uncertainty about Europe, "more contractionary" fiscal policies, and the country's "depressed" housing market.
All of which underscores why, despite signs of slow-but-sure progress, policy makers such as Bank of Canada Governor Mark Carney say the United States will take years to recover from its current state, and may never return to its pre-crisis form.
"People may have been getting too optimistic that we were going to get this big acceleration in growth," said Andrew Grantham, an economist with CIBC World Markets in Toronto. "The recovery is intact, but it's still not a typical recovery."