US economy grows at 2.5% in Q4

Mar 29 | Updated: Mar 30 2007, 06:01am hrs
The US economy grew at an annual rate of 2.5% in the fourth quarter, hobbled by slumps in home construction and business investment that show no sign of ending.

The final revision to gross domestic product, the sum of all goods and services produced, compares with a 2.2% rate reported last month, the Commerce Department said today in Washington.

A measure of inflation watched by the Federal Reserve rose less than forecast. Increasing subprime loan defaults and foreclosures threaten to deepen a housing slowdown that last quarter was already the worst in more than 15 years.

Coupled with a drop in corporate profits and less business investment, the economy may not be able to attain Federal Reserve Chairman Ben S Bernankes forecast of moderate growth. Capital spending is in a funk, and the housing recession is ongoing, Cary Leahey, senior economist at Decision Economics in New York, said before the report. Growth could be slower this quarter.

For all of last year, the economy grew 3.3%, compared with 3.2 % in 2005. The third quarters growth rate was 2 %. Economists surveyed by Bloomberg News had forecast fourth- quarter growth at 2.2%, according to the median of 75 estimates.

Estimates ranged from 2% to 2.5%. Home construction fell at an annual rate of 19.8%, the most since 1991, after an 18.7 % drop the previous three months.

The decline subtracted 1.2 percentage points from growth. The housing slowdown remains one of the biggest concerns this year, economists said.

New-home sales unexpectedly fell last month to the lowest level in almost seven years, a government report this week showed. While February housing starts rebounded in February from a nine-year low, building permits, a sign of future construction, declined.

Rising defaults by subprime mortgage borrowers, or those with poor or limited credit histories, are damping prospects for a quick housing recovery.

More foreclosures increase the possibility that builders and sellers will have to compete with a bigger glut of properties on the market, pushing down prices.

Fed Chairman Ben S Bernanke on Wednesday said the damage from the mortgage crisis would be limited and maintained the central banks growth forecasts.