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Economy grew 2.8% last quarter, but the outlook is hazy

WASHINGTON — The economy grew late last year at a pace that in normal times would suggest it's healthy.

But the 2.8 percent annualized growth rate in the October-December quarter — the fastest pace since the spring of 2010 — isn't being cheered by most economists or investors. That's because growth would need to be much stronger to sharply reduce unemployment. And signs in the data point to slower growth ahead.

For all of last year, the economy grew just 1.7 percent. That was barely more than half of the growth in 2010. The outlook for all of 2012 is slightly better. The Federal Reserve estimates growth of roughly 2.5 percent for the year.

Though the economy has picked up and is far stronger than during the Great Recession, unemployment is still a high 8.5 percent. Many people remain reluctant to spend more or to buy a home. Many employers are still hesitant to hire.

The economy is measured by gross domestic product, or GDP, which covers everything from haircuts to hotel bookings to jet fighter planes. Friday's estimate was the first of three for the fourth quarter.

In the final three months of 2011, Americans spent more on vehicles, and companies restocked their shelves at a robust pace. But overall growth last quarter — and for all of last year — was held back by the sharpest cuts in annual government spending in four decades, the Commerce Department said Friday.

Several factors are expected to exert more of an economic drag this year: cuts in military and other federal spending; a slower pace of company restocking; weak or flat pay increases; and sluggish growth in consumer spending.

Much of the growth was powered by a 14.8 percent surge in sales of automobiles and other long-lasting manufactured goods.

Incomes, which had been weak all year because of high unemployment, grew at a modest 0.8 percent annual rate. That followed two straight quarters of declining incomes. But unless pay increases pick up, consumers who have dipped into savings in recent months may pull back.

Ian Shepherdson, an economist at High Frequency Economics, is among the more optimistic analysts. He said he thinks business investment in capital goods will be stronger and consumer spending will be higher this year.

Richard DeKaiser, a senior economist at Parthenon Group, expects just 2 percent annual growth in the January-March quarter. But DeKaiser said that should be the weakest quarter. He expects the economy to gain strength in each quarter and grow 2.6 percent for the entire year.

Confidence on the rise

Consumer confidence rose more than forecast in January, to the highest level in almost a year, on signs of improvement in the job market. The Thomson Reuters/University of Michigan final index of consumer sentiment climbed to 75 from 69.9 at the end of December. The gauge averaged 89 in the five years leading up to the 18-month recession that ended in June 2009.

Bloomberg News

Economy grew 2.8% last quarter, but the outlook is hazy 01/27/12 [Last modified: Friday, January 27, 2012 9:44pm]
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