The nation's total output of goods and services increased at a paltry 0.7 percent annual rate during the final three months of 2002. That's significantly slower than the healthy 4.0 percent gain recorded during the third quarter. Consumer spending increases slowed markedly in the fourth quarter—no surprise, given declining consumer confidence and the disappointing holiday retail sales. After solid if unspectacular gains compared to the first nine months of 2002, exports declined during the final quarter of last year, further dampening the nation's economic growth momentum.

From the perspective of sustainable economic growth, the most disturbing aspect of the fourth-quarter GDP report was that all of the net gain in economic activity was due to an increase in government spending. Business inventory investment actually reduced the quarter's GDP numbers by 0.6 percent. Meanwhile, consumer spending, exports, and capital spending were essentially unmoved. But federal government spending—defense and non-defense alike—soared at a double-digit growth rate during the final months of last year.

Despite the tentativeness of the GDP report for the final quarter, there was one moderately encouraging piece of news. Total capital spending by U.S. businesses increased for the first time since the third quarter of 2000. The annualized increase of a modest 1.5 percent in total business investment was due to two factors. These are a much smaller contraction in spending for non-residential buildings (at -9.3 percent, the "best" number for the sub-sector in the past six quarters), and an increase for the third consecutive quarter in equipment and software investments.

Preliminary Commerce Department numbers for all of 2002 show that the nation's overall GDP expanded 2.4 percent. During the early months of 2002, almost all forecasters were looking for full-year growth of 1.0-1.4 percent. The actual number is also a marked improvement from the negligible (0.3 percent) increase in 2001. Yet, it was the second-weakest annual gain of the past decade. Despite the geopolitical uncertainties and economic challenges facing us, the current consensus looks for a GDP gain of a somewhat better 2.5-3.0 percent this year.