GDP growth was a mere 0.6%

Investors see more Fed interest rate cuts today

By Tom Stundza -- Purchasing, 1/30/2008 9:28:00 AM

The U.S. economy braked sharply in the fourth quarter, pulling growth for all of 2007 to its lowest speed in five years as the housing slump took a toll. Gross domestic product (GDP) rose at a seasonally adjusted 0.6% annual rate October through December, the Commerce Department reported today in the first estimate of fourth-quarter GDP. For the full year, the economy grew 2.2%, down from 2.9% in 2006 and the weakest growth since 2002.

GDP acts as a scoreboard for the economy by measuring all goods and services produced and its fourth quarter growth rate was well below Wall Street expectations. Economists suggest the tepid late-year growth should help advance the case that the Fed needs to be aggressive in reducing rates, given that many economists believe growth has slowed further in the current quarter.

A review of the data shows that the housing component, residential fixed investment, dropped by 24% in the fourth quarter after falling 21% in the third quarter. The biggest GDP component, consumer spending, increased a paltry 2% after increasing 2.8% in the third quarter. Fourth-quarter business spending rose 7.5% in the fourth quarter but businesses liquidated inventories: Stockpiles of all goods decreased by $3.4 billion, after going up by $30.6 billion in the third quarter and $5.8 billion in the second quarter.

The GDP report comes amid rising concern that the U.S. economy is falling into a recession, with some economists arguing the downturn started in the final month of 2007. It also comes as the Fed concludes a two-day meeting to consider whether or not to cut interest rates once again in order to spur the economy and ward off a recession. The central bank has already lowered rates by 1.75 percentage points since September, including an emergency 0.75 percentage point cut, also known as a 75 basis point cut, a week ago. According to a CNNMoney.com report, investors are betting that the Fed announces at least another quarter percentage point cut, or 25 basis points, when it announces its decision at 2:15 p.m. today.