GDP Nosedive Could Handcuff Bush

ByABC News
January 27, 2006, 10:38 AM

Jan. 27, 2006 — -- A surprising government report this morning showed U.S. economic growth slowed considerably in the fourth quarter of 2005, an indication that skyrocketing energy prices were hitting consumers' wallets and slowing spending.

The Department of Commerce report showed that the nation's economy grew at an anemic 1.1 percent -- the worst performance in three years.

This first read of Gross Domestic Product growth for the October-to-December period will affect the stock markets significantly today, and will likely force changes in next week's Fed interest-rate meeting and the president's State of the Union address.

Economists had expected a drop-off from the third quarter's rather impressive performance. The consensus had the final three months of 2005 coming in at a relatively solid 2.9 percent

The number is also significantly below the three-year GDP growth average of 3.4 percent.

The release suggested that growth was stymied by a steep reduction in consumer spending -- fewer cars sold and a rather tepid holiday spending season -- and business spending on technology. Also down significantly: government spending.

It's important to note that today's report is just the first of three reads on fourth-quarter GDP, so the number is likely to be revised significantly in the next two months. The first read is based on an incomplete data set.

The economy, which has powered through terror attacks, foreign wars, and unprecedented natural disasters, is starting to see some weakness. Whether this is a temporary speed bump made of rising mortgage rates, a wobbly auto market, and lower consumer confidence is yet to be seen.

This report raises speculation that the U.S. Federal Reserve may not raise interest rates when it meets next Tuesday. Before today, the majority of economists were betting that we'd see the 14th quarter-point interest-rate hike at the final meeting of Alan Greenspan's chairmanship.

Also at risk, some of President Bush's "clap" lines at next week's State of the Union address. The administration was set to crow about the amazingly resilient American economy, which had powered through pretty much anything that fate had thrown at it for the five years of the Bush presidency.

With this steep dip in growth, advisers and speechwriters might be forced to ratchet back the rhetoric for fear of giving Democrats some great "ad" fodder for the coming election cycle. If Bush is bullish on the economy, and it turns out we see a continuing downturn in growth in the next six months, voters will likely feel as though the administration is disconnected from their day-to-day lives.

The GDP report, the broadest measure of the health of the American economy, is very important, and the downturn is surprising.

Definition: Gross Domestic Product is the broadest measure of economic activity in the United States. The report measures the value of all goods and service produced in the country.