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WASHINGTON — The U.S. economy slowed more sharply in the final three months of the year than initial estimates, reflecting weaker business stockpiling and a bigger trade deficit.
The Commerce Department said Friday that the economy as measured by the gross domestic product grew at an annual rate of 2.2 percent in the October-December quarter, weaker than the 2.6 percent first estimated last month. It marked a major slowdown from the third quarter, which had been the strongest growth in 11 years.
Economists, however, remain optimistic that the deceleration was temporary. Many forecast that growth will rise above 3 percent in 2015, which would give the country the strongest economic growth in a decade. They say the job market has healed enough to generate strong consumer spending going forward.
The economy is “doing just fine,” said Paul Ashworth, chief U.S. economist at Capital Economics, who noted that although GDP growth slowed in the fourth quarter, the U.S. added an average of 284,000 new jobs from October through December.
For all of 2014, the economy expanded 2.4 percent, up slightly from 2.2 percent growth in 2013.
A bright spot
Consumer spending, which accounts for 70 percent of economic activity, was a bright spot in the fourth quarter. It expanded at an annual rate of 4.2 percent, down slightly from the first estimate of 4.3 percent growth but still the best showing since the first quarter of 2006.
Friday’s report was the second of three estimates for fourth quarter GDP, the broadest measure of the economy’s total output of goods and services.
Sal Guatieri, senior economist at BMO Capital Markets, said that “while the economy ended the year with less momentum than in the summer and fall, average annual growth of 2.9 percent in the past six quarters still denotes a meaningful upward shift from 2.1 percent in the first four years of the recovery.”
The downward revision stemmed largely from slower stockpiling by businesses. Last month, the rise in inventories was estimated to have added 0.8 percentage points to fourth quarter growth. But that was lowered to a contribution of just 0.1 percentage point in the new estimate. The change, however, will likely translate into stronger growth in the current quarter because businesses will not have to work down an overhang of unsold goods.
Trade also weighed more heavily on growth than first thought, subtracting 1.2 percentage points as imports grew much more strongly than first thought. That could be a reflection of the rising value of the dollar, which makes imported products cheaper for U.S. consumers.
A slow start
Many analysts believe 2015 will start slowly, in part reflecting the disruptions caused by a rough winter. However, it’s unlikely to be as bad as the first quarter of 2014, when heavy snow and cold contributed to a 2.1 percent plunge in growth in the first quarter of 2014.
That big drop was followed by sizzling growth rates of 4.6 percent in the second quarter and 5 percent in the third quarter.
Analysts are looking for less of a roller-coaster ride this year. JPMorgan economists say growth will come in around 2.5 percent in the current quarter and then hover between 2.5 percent to 3 percent for the rest of the year. They are forecasting growth of 3.1 percent for the entire year, a significant improvement from the 2.4 percent growth seen in 2014.
If the forecast proves accurate, it would be the best GDP performance since the economy grew by 3.3 percent in 2005, two years before the beginning of worst economic downturn the country has experienced since the 1930s.
Joel Naroff, chief economist at Naroff Economic Advisers, is even more optimistic. He’s forecasting economic growth of 3.5 percent this year.
Naroff and other economists believe the key to the economy shifting into a higher gear will be further improvements in the labor market, when stronger job gains leading to rising wage gains.
“I see 2015 as a really good year for consumer spending because of the wage gains,” Naroff said.
Even though the recession ended nearly six years ago, wage growth has been weak as businesses were able to pay less with so many unemployed looking for jobs.
Several large companies have already signaled a willingness to pay more to retain workers. Retailers like TJX and The Gap, as well as the health insurer Aetna.
News last week that Wal-Mart, the nation’s largest private employer, would also increase its minimum pay could be a sign that a tighter labor market are finally leading to increased wages, some analysts believe.
The unemployment has fallen to 5.7 percent.
Federal Reserve Chair Janet Yellen, testifying to Congress this week, listed stronger wage growth as one of the elements the central bank is looking for before deciding to start raising interest rates. She said as long as wage gains remained weak and inflation low, the Fed was prepared to remain “patient” in moving to raise rates.
Many private economists believe the Fed’s first move to increase its key rate, which has been near a record low of zero for six years, will not come until June at the earliest.
5 reasons U.S. economy is stronger than Q4 GDP suggests
REALISTIC GROWTH: The sizzling growth rate in the July-September quarter was never going to last. One-time factors, such as a 16 percent surge in federal defense spending, fueled the strongest acceleration in almost a dozen years. The third quarter growth followed a 4.6 percent jump in the second quarter, which was also misleading. That was credited to a robust rebound after harsh winter weather sent the economy into reverse in the first quarter. After such big swings, it’s natural that economic growth would settle into a more sustainable pace.
CONSUMER STILL KING: The centerpiece of the fourth quarter’s growth was consumer spending, which expanded at a 4.2 percent rate. That was the strongest quarterly growth since early 2006. Consumers benefited from falling gas prices, which gave them more to spend on other items. Consumer spending accounts for 70 percent of economic activity, and economists said the solid performance in the final three months of the year was an encouraging sign going into 2015.
BUSINESS SPENDING: Another promising sign emerged from companies. Friday’s report revealed that they increased investment spending to expand and modernize their facilities at a solid 4.8 percent rate in the fourth quarter. While that was down from the pace over the previous six months, it was a marked improvement over the government’s first estimate that business investment had only risen at a 1.9 percent pace during the three-month period. The robust upward revision eased concerns that businesses might cut back sharply on investment in the face of global economic weakness and a rising dollar, which hurts export sales. Moreover, one area of weakness in the government’s report Friday — a slowdown in business stockpiling — may turn out to be a good thing for the future. Slower inventory building in the fourth quarter will mean that businesses will spend more in the coming months as they respond to rising demand. That should then lead to stronger factory production and ultimately, economic growth.
JOB GROWTH: While GDP growth slowed in the fourth quarter, the job market was on a roll. The surge continued into January, giving the country the strongest pace of job creation in 17 years — job gains of 423,00 in November, 329,000 in December and 257,000 in January. Hopes for 2015 stem from the theory that strong job growth and falling unemployment will force employers to start boosting salaries to attract workers. The combination of more jobs and rising salaries is likely to fuel strong consumer spending this year.
THE ROAD AHEAD: To be sure, not all the signals are flashing green. The GDP report showed that trade will likely weigh on the economy this year. Imports shot up at a much faster rate than exports, and the wider deficit subtracted 1.1 percentage points from fourth quarter growth. The stronger dollar makes imports cheaper and more attractive to U.S. consumers but dampens demand for U.S. exports. Housing has also lagged in the recovery, though it is expected to strengthen this year. A separate report Friday from the National Association of Realtors showed that the number of Americans signing contracts to buy homes rose at a healthy pace in January. For the current January-March quarter, economists forecast GDP to grow at a pace of about 2.5 percent. They expect further strengthening as the year progresses. Many analysts believe growth for all of 2015 will top 3 percent, giving the country the strongest year since GDP grew 3.3 percent in 2005. That would represent a significant acceleration after average growth of just 2.2 percent over the past five years. Analysts expect the Federal Reserve to respond later this year by raising rates from record lows near zero.