U.S. Economy Grew Anemic 0.7% in Fourth Quarter 2016

U.S. Economy Grew Anemic 0.7% in Fourth Quarter 2016

The U.S. economy sputtered in the final months of 2015, a possible sign of flagging momentum amid global weakness and financial market turmoil

Gross domestic product, a broad measure of economic output, expanded at a 0.7 % seasonally adjusted annualized rate in the fourth quarter, the Commerce Department said on January 29, 2016. The economy had advanced 2 % in the third quarter and 3.9 % in the second quarter.

Economists surveyed by The Wall Street Journal had expected GDP to grow at a 0.8 % pace in the October-to-December span.

Despite weak first and fourth quarters to bookend the year, growth for 2015 as a whole was steady. For the full year, GDP expanded 2.4%, the same as in 2014 and a little better than the 2.1 % average since 2010, the first full year after the recession.

What is less clear is whether the fourth quarter was another dip that will be followed by a rebound—as has happened several times since the recession ended in mid-2009—or whether it signals a more persistent slowdown.

”The key theme in these numbers is the stark contrast between the fortunes of the household and business sectors,” Stephen Stanley, chief economist and Amherst Pierpont Securities, said in a note to clients.

While households continued to spend, businesses pulled back.

The dynamic may reflect an array of economic crosscurrents over the last year. Steady job gains, an improving housing market and banner auto sales helped underpin growth through much of the year. But rapidly falling oil prices and a strong dollar have had a mixed impact on businesses and consumers. And a slowdown in China and persistent weakness in Europe have been a drag on many firms. Financial market turmoil has given some pause.

The Federal Reserve in December decided to raise interest rates for the first time in nearly a decade, citing a healthy labour market and other signs of steady economic growth.  Central bank officials, following a two-day meeting this week, sounded less certain about plans for additional increases this year.

”The Fed (central bank) is closely monitoring global economic and financial developments and is assessing their implications for the labour market and inflation, and for the balance of risks to the outlook,” officials said in a statement.

Low rates are meant to spur investment and hiring but also risk distorting markets. By keeping rates near zero, the Fed also is armed with less ammunition in the event of another recession.

GDP numbers of January 29, 2016, showed inventory investment, trade and business spending were all drags on the economy during the fourth quarter. Inventory figures can be volatile and could reverse in the early part of 2016. A decline in net exports, meanwhile, largely reflects the strong dollar and overseas demand.

Business investment could be more of a concern. Non-residential fixed investment fell 1.8 % in the fourth quarter as companies trimmed outlays on structures and equipment.

Spending in the energy industry has been especially constrained amid low commodity prices—outlays on mining, shafts and wells tumbled 35 % during all of 2015, the sharpest drop in nearly three decades.

 Personal consumption, which accounts for more than two-thirds of economic output, rose 2.2 % in the fourth quarter, down from 3 % in the third quarter. Cheaper gasoline and steady job gains were not enough to allay a sense of caution in the final months of the year.

But even with the fourth-quarter pullback, full-year consumer spending in 2015 grew 3.1 %, the fastest pace in a decade.

Spending on residential investment, such as new home construction and home remodelling, advanced 8.1 % in the fourth quarter. The housing market in 2015 was by some measures the strongest since before the recession.

”The broad picture of household sector resilience looks intact, with real disposable income still growing at a decent clip and residential investment powering on,” said Brian Coulton, chief economist at Fitch Ratings. “U.S. growth is likely to stay in the 2 % to 2.5 % range in 2016.”

Overall government spending expanded during the fourth quarter. Federal nondefense spending grew 1.4 % and defence spending rose 3.6 %. Spending at the state and local level contracted 0.6 %.

The latest economic figures come against a backdrop of low inflation. The price index for personal consumption expenditures rose only 0.1 % from the prior quarter. Core prices, which exclude volatile food and energy costs, rose 1.2 %.

The advance GDP figures are based on incomplete information and often are heavily revised as more data becomes available.


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