According to the Commerce Department, U.S. economic growth slowed considerably in the final three months of 2002. Gross domestic product rose at a 0.7 percent annual rate for the fourth quarter after adjusting for inflation, considerably slower than the 4 percent growth rate reported for the third quarter. Over the year 2002, economic growth was a moderate 2.8 percent. Consumers, who had sustained the recovery throughout 2002, turned cautious, and consumer spending rose at a 1 percent annual rate, the smallest increase in a decade. On a positive note, business investment recorded its first positive gain in two years, but the gain was not significant enough to compensate for the cutback in consumer spending.

Sales of automobiles and trucks decreased by $25 billion, accounting for virtually all of the decreased consumer spending. Special incentives such as zero-interest financing and dealer rebates had propped up auto sales for the last few years. However, uncertainty about the war with Iraq and high unemployment led consumers to be relatively cautious. Housing was one of the few sectors that continued to be a source of strength. Investment in residential housing rose 6.8 percent in the fourth quarter. Sales of new homes rose by 37,000 in December and for the year sales were a record 976,000.

Exports declined in the fourth quarter while imports increased, resulting in an increase in the trade gap of $18.9 billion. Government spending increased 10.1 percent in the quarter, largely as a consequence of increases in military spending resulting from a call up of reserves and mobilization for a possible war. Absent the increase in government spending, GDP would have declined by 0.2 percent.

Most forecasters are predicting an increase in the rate of economic growth barring an economic shock such as a significant increase in the price of oil. Estimates are that growth for the first quarter of 2003 will reach 2.5 percent and increase to 3.5 percent in the second half of the year.

Many economists believe that the primary problem with the economy is its failure to meet consumer expectations. The late 1990s were characterized by significant economic growth and substantial run-ups in the stock market. Lots of people made lots of money. The recession of 2000 coupled with the terrorist attacks of September 11 changed all that. The economy is fundamentally sound, and as moderate growth continues, economists expect expectations to align with performance.

(Updated April 3, 2003)