US economy at four-year low as growth slows

DIANE COYLE

Economics Correspondent

The American economy was at its weakest for four years in 1995, with growth in the final quarter unexpectedly slow. Figures for GDP growth yesterday rekindled hopes that the Federal Reserve will cut interest rates next month.

This did not prevent shares on Wall Street falling following their spectacular rise on Thursday. The Dow Jones index was nearly 9 points lower at 5599.78 by late morning. This followed the previous day's 92 point jump - the biggest in five years - through the 5,600 level to a new record. Treasury bonds moved higher after the release of the figures.

The economy's weakness comes as worrying news for President Clinton in election year. The Administration has been urging the Federal Reserve - whose chairman, Alan Greenspan, it renominated for another term earlier this week - to lower interest rates.

Everett Ehrlich, Undersecretary of Commerce, said yesterday he agreed with Mr Greenspan's assessment that the economy is going through a ''soft patch''. Earlier this week Mr Greenspan told Congress that the chances of the economy rebounding exceed 50 per cent.

GDP grew 2.1 per cent last year, the slowest since the recession year 1991 and down from 3.4 per cent in 1994. In the fourth quarter it increased at an annualised rate of 0.9 per cent, about half what was expected.

Lacy Hunt, chief economist in the US for HSBC Markets, said: ''The figures suggest the Fed has more work to do.''

Most of the quarter's growth was explained by spending on computers and computer equipment. This increased at its fastest rate since the early 1980s. Exports also grew faster, climbing an impressive 10.9 per cent at an annual rate.

Other categories, and especially consumer spending, were very weak. Consumers increased spending by only 0.8 per cent, well below trend. Spending on non-durable goods was down 1.4 per cent, and on durables up a meagre 1 per cent. Lower levels of stockbuilding contributed to slower growth, while the rise in investment spending was subdued.

Not surprisingly, given the shutdown of the Federal government, a 3.7 per cent drop in government spending in the fourth quarter helped reduce growth.