U.S. economy grows at slowest pace in 3 years

White House spokesman Scott McClellan emphasized that growth for all of 2005 was a brisk 3.5 percent.

Democrats seized on the GDP report to blast the White House for pushing tax cuts they say have ushered in high deficits while failing to do enough to help poor and middle-class Americans.

Gene Sperling, a former economic aide to President Clinton, accused the Bush economic team of trying over the past few months to “create a selective and exaggerated picture of the economy” to justify the tax cuts.

Carroll Doherty, an analyst with the Pew Research Center, said the irony was that the main concern of the Bush administration up until now had been calling attention to upbeat figures on payroll growth and jobs the public had largely been ignoring.

“The difficulty for Bush is that there is already a good deal of pessimism out there,” Doherty sai

Analysts were skeptical about the drop in federal spending shown in the report and believed that would be reversed, especially given costs related to the war in Iraq and hurricane cleanup and rebuilding.

Businesses, meanwhile, boosted spending on equipment and software in the final quarter of last year at a 3.5 percent rate, the smallest gain since the first quarter of 2003.

Spending on residential projects also rose at a 3.5 percent pace in the fourth quarter. That was down from a 7.3 percent pace in the prior quarter.

An inflation gauge tied to the GDP report showed prices rose at 2.6 rate in the fourth quarter, down from a 3.7 percent pace in the third quarter.

However, when food and energy prices are excluded, “core” inflation — which the Fed watches closely — rose at a 2.2 percent rate in the fourth quarter, a pickup from the 1.4 percent growth rate in the third quarter. That suggests inflation is filtering into a variety of other prices.

To fend off inflation, the Federal Reserve is expected to boost interest rates next Tuesday one-quarter percentage point to 4.50 percent. It will be last meeting for Alan Greenspan, who will retire that day after more than 18 years running the central bank.

Zandi said the core inflation figures contained in Friday’s report reinforces his belief that the Fed will tighten next week and again on March 28.

President Bush, in his State of the Union address Tuesday evening, plans to put the spotlight on some pocketbook issues, including high energy prices, tax cuts and expensive health care costs.

Public concern about the economy is still relatively high, according to polls. Sixty-four percent described economic conditions as fair or poor, while 34 percent said they are excellent or good, according to the Pew Research Center for People & the Press.

The 3.5 percent increase in GDP for all of 2005, was down from a 4.2 percent gain in 2004. Economists predict the economy for all of this year will turn in another good performance with growth topping 3 percent.

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