U.S. economy still ticking, just barely

GDP rose by only 0.6 percent last quarter, the slowest rate in one year.

Lenny Ignelzi/AP
San Diego building inspector Michael Schwartz (l.) discusses building plans with contractor Oscar Afshari. This is one of the first homes being built to replace ones lost in last fall's wildfires.
SOURCE: Bureau of Economic Analysis/Rich Clabaugh–STAFF

The US economy is losing its momentum but is stubbornly refusing to drift into a recession.

Instead, it appears that consumer purchases of appliances such as flat-screen TVs, a modest increase in state and local spending, and continued strength in the construction of commercial buildings have kept the economy on the plus side.

Housing, however, remains a major drag on economic growth. And businesses are continuing to let inventories run down.

"I would say the economy is hanging by a thread, but I think the thread will hold," says Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh.

A measure of how close the economy is to dropping into negative territory came on Wednesday, when the Commerce Department, in a preliminary estimate, said the gross domestic product rose by a 0.6 percent rate in the last quarter of 2007. This was the lowest rate of growth since the first quarter of last year. In the ensuing year, the banking system wrote off billions of dollars in bad debt, housing prices fell by more than 7 percent, and consumers became more cautious, especially as energy prices soared. For 2007 overall, the Commerce Department estimated that GDP rose 2.2 percent.

Keeping the economy out of a recession is now one of the major tasks facing policymakers. Congress is racing to enact a stimulus package to help the economy late this spring or early summer. The Federal Reserve has reduced interest rates by 2-1/4 percentage points since the middle of September. That includes a half-point rate reduction announced Wednesday afternoon.

Even though the GDP report shows a weaker economy, on Wednesday, economists were surprised to see an early indication that the jobs market may have bounced back in January. A national employment report from ADP Employer Services found that jobs increased by 130,000 this month. On Friday, the Labor Department will issue its jobs report, which economists think will show a gain of closer to 110,000 jobs.

"If the ADP numbers are confirmed on Friday, it would indicate the economy has been weakened by housing but not knocked out," says Mr. Hoffman. "It would be counter to recession discussions."

Even though housing continues to drag down the economy, some economists are beginning to sense that activity on new houses may start to improve this year.

"You get anecdotal reports of vulture real estate funds buying up properties," says economist Bob Gay of Fenwick Advisers in Rye, N.Y. "I heard a guy talking about some land in New Jersey he had bought, and he said, 'I stole the property,' " says Mr. Gay. "I think the steepness of the housing decline will bottom out, and from here on forward it will be a more gradual decline."

However, it could be another year or two until housing prices begin to stabilize, Gay says. "For the next six months, we're at the crescendo of the forced sales," he predicts.

On Tuesday, there was continued evidence of the home-price decline. The Standard & Poor's/Case-Shiller home price index fell 2.1 percent in November compared with October. Year over year, prices are down 7.7 percent. Seven metro areas showed double-digit declines.

But in some parts of the country, it's not all doom and gloom. Portland, Ore.; Seattle; and Charlotte, N.C., continue to see modest price increases.

There may also be some signs that San Diego, which went into a housing slowdown earlier than most areas, is starting to improve. For one thing, buyers from Asia and Canada are picking up properties. "The Korean government took restraints off their citizens so they can own property outside their country, so that has helped," says Sherman Harmer Jr., president of Urban Housing Partners Inc. in San Diego. "We have seen a doubling in traffic in the last two months."

Once the economic stimulus package passes Congress, as it is widely expected to, Mr. Harmer thinks that housing in San Diego will benefit from one of the package's provisions, which will increase the size of loans that can be purchased by Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA). Under the current rules, a high-quality loan can be sold to one of the government agencies if it is under $417,000. Under the new provision, the loan limit would temporarily go up to $729,750.

"It will allow buyers to make $30,000 less in income to qualify for a loan and will result in a $600-a-month smaller payment," Harmer says of the proposed change.

San Diego County is also benefiting from a continued increase in jobs. The county expects to add 14,000 jobs this year, Harmer says. The growth is coming from biotech firms, which are benefiting from state funding of stem-cell research, and clean-tech companies.

Helped by the weaker dollar, tourism in California also continues to grow: Foreigners are flocking to the United States, and it's becoming more expensive for Americans to travel abroad.

Tourism in Los Angeles County also benefited from the higher price of gasoline as tourists stayed closer to home, says Carol Martinez of LA Inc., which promotes tourism.

Later this year, she says, tourism on the West Coast will get a boost when China allows its citizens to visit the US as part of a special visa program for group tours. International travel represents 18 percent of L.A. County's visitors but 30 percent of the tourist spending. "We like people with fat wallets," Ms. Martinez says.

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