US growth slows but recovery is on track

The US economy grew at an annualised rate of 4 per cent in the final three months of last year, more slowly than expected but strongly enough to suggest the economic recovery remains on track.

With the one-off effects of tax rebates and strong incentives to buy cars removed, the growth rate was more modest than the 8.2 per cent growth of the previous quarter.

Economists said the figures were solid but would not put pressure on the Federal Reserve to bring forward rate rises.

The core personal consumption expenditure deflator, the Fed's favoured measure of inflation, rose by an annualised 0.7 per cent in the fourth quarter - the lowest increase since 1962.

The figure underlined the fact that although the Fed may have jettisoned its mantra that rates would remain on hold for a "considerable period", a tightening of monetary policy might still be some time off.

Although the gross domestic product figures were seen as an anticlimax, optimists were cheered by a strong rise in the Chicago purchasing managers index of manufacturing activity, which hit its highest level in nine years. Purchasing managers surveys have appeared recently to exaggerate the strength of industry.

Economists said the breakdown of the GDP figures, by contrast, pointed to steady but unspectacular growth.

The pace of consumption slowed slightly more abruptly than had been expected, with the annualised rate of increases declining from 6.9 to 2.6 per cent. Economists said this was likely to be lifted by the effect of tax cuts in the first half of the year. Nevertheless, there were ominous signs that the financial position of consumers was weakening.

Real personal disposable income fell 0.5 per cent and the savings ratio slid from 2.3 to 1.5 per cent - near a record low and well short of the long-run average of 7.6 per cent.

Businesses continued to invest briskly, with non-residential investment climbing 6.9 per cent, against 12.8 per cent in the third quarter.

The impetus came from the 10 per cent rise in equipment and software spending.- (Financial Times Service)