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US GDP growth cools more than forecast in Q4

H.S. Borji
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www.finances.com

The US economy cooled more than forecast in the fourth quarter following a record-setting six month period, as weak business spending and a growing trade deficit offset sharp gains in consumer spending.

US gross domestic product grew 2.6 percent annually in the final three months of 2014, following a 5 percent gain in the third quarter that was also the biggest in 11 years, the Commerce Department reported today in Washington. Economists forecast an annualized gain of 3 percent.

The advance reading is the least reliable estimate of GDP because it is based on incomplete data. The Commerce Department will release a revised estimate based on more complete figures November 27.

“The increase in real GDP in the fourth quarter reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, nonresidential fixed investment, state and local government spending, and residential fixed investment,” the government said today in a press release.

Consumer spending, which represents more than two-thirds of the US economy, rose 4.3 percent in the fourth quarter following a 3.2 percent advance in the previous quarter. That was the biggest gain since the first quarter of 2006.

Gains in consumer spending were partially offset by negative contributions from federal government spending. Imports, which are a subtraction from GDP, increased in the fourth quarter, official data showed. A bigger trade deficit subtracted 1.02 percentage points from GDP in the fourth quarter. Trade had added 0.78 percentage points to growth in the July to September period.

Business spending on equipment also decrease in the final stretch of 2014, falling 1.9 percent. That was the largest contraction since the second quarter of 2009.

The GDP price index, which measures the prices paid by US residents, declined 0.1 percent in the fourth quarter following an upwardly revised gain of 1.4 percent in the third quarter. Economists forecast an increase of 0.8 percent.

Economists believe the fourth quarter slowdown was largely due to plunging oil prices, suggesting growth will pick up in the coming quarters as the effects of the oil price shock moderate. The price of gasoline has plummeted around 60 percent since the summer, driving down global inflation. Central banks in Canada, Europe and Asia have eased monetary policy this month to counteract deflationary pressures. Economists expect inflation to weaken further in the coming months before rebounding in the latter half of the year.

Oil futures rebounded on Friday. US crude – West Texas Intermediate – for March delivery rose 1.2 percent to $45.05 a barrel. Global benchmark Brent crude edged up 0.2 percent to $49.24 a barrel.

The US economy expanded 2.4 percent in all of 2014, up slightly from the previous year’s 2.2 percent rate. The Federal Reserve expects the economy to grow at a solid pace this year, enough to warrant an interest rate increase in the coming months. However, economists believe that weak inflation may push back the Fed’s timetable on a rate adjustment to the latter half of 2015. The markets had previously priced in a rate-hike for June.

The US central bank has held its target for the overnight rate at 0.25 percent since December 2008.

 

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