Economic growth in 2nd half of 2013 fastest in a decade

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The economy in the second half of 2013 grew by the fastest rate in a decade, despite the depressing effect of a prolonged government shutdown and deep federal budget cuts, the Commerce Department reported Thursday.

The solid 3.2 percent growth rate posted in the final quarter of 2013, combined with the even more robust 4.1 percent growth rate in the summer quarter, was the strongest performance since 2004 and suggested the U.S. economy is starting to take off and shake off its post-recession doldrums despite the stop-and-go effects caused by Washington’s wrangling over the budget.

“U.S. economic growth has finally accelerated from fair to good,” and growth would have been even higher at over 4 percent in the final quarter without the federal austerity measures, said Doug Handler, chief U.S. economist at IHS Global Insight. Since budget cuts are expected to be more modest this year, he expects the trend to continue in 2014.

The upbeat growth report spurred a rally on Wall Street, which has been stricken in recent days by worries about a collapse in emerging markets. The Dow Jones industrial average rose 109 points, or 0.7 percent, to close at 15,848.

Consumers, after years of cringing in response to the antics in Washington, last fall appeared to largely shrug off the 16-day October shutdown resulting from a standoff between President Obama and Republicans in the House, and went ahead and spent at a brisk pace, propelling the economy forward despite the political turmoil.

Consumer spending, which accounts for 70 percent of economic activity, surged to a 3.3 percent pace from 2 percent in the third quarter.

Even so, a 12.6 percent plunge in federal government spending posed a significant drag on growth, with the shutdown alone subtracting 0.3 percentage points from the headline growth rate, the department calculated.

Housing also slowed growth during the quarter as residential investment fell by 9.8 percent in the wake of big interest rate increases during the summer.

“Very, very healthy and encouraging consumption growth is the backbone of this report. That usually spells good news ahead,” said Justin Wolfers, economics professor at the University of Michigan. “It’ll be nice to get the fiscal austerity monkey off the back of the economy in 2014.”

The Federal Reserve has cited the “underlying strength” in the economy — despite federal budget cuts — as its reason for starting to pull back on its economic stimulus program since last month. Economists say Thursday’s growth report vindicated the Fed’s position, which has elicited some criticism on Wall Street.

Besides getting the push from a strong contribution by consumers, the economy benefited last quarter from an 11.4 percent surge in exports and the apparent end of the long drought caused by state and local budget retrenchment, with growth in that sector now contributing to the expansion.

Big tax increases and budget cuts early last year held down growth overall during the year to a tepid 1.9 percent.

“No headline shock, but some of the details are startling,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, noting that housing fell off a cliff last fall after 30-year mortgage rates rose by a full percentage point from around 3 percent to over 4 percent in anticipation of the Fed’s pullback on stimulus.

Housing had surged at double-digit rates in the previous five quarters, providing a powerful boost to the recovery, but economists expect housing to provide only moderate support to growth this year as the Fed continues to slow its monthly purchases of mortgage and Treasury bonds.

“We are more optimistic about 2014 because of clear signs that consumer spending is picking up” despite the political infighting in Washington and change of direction at the Fed, said Joseph Lake, U.S. analyst at the Economist Intelligence Unit.

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