Economy Grows at Slower Pace Despite Robust Household Spending

Thursday, 30 Jan 2014 08:34 AM

 

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Robust household spending and strong exports kept the U.S. economy on solid ground in the fourth quarter, but stagnant wages could chip away some of the momentum in early 2014.

Gross domestic product grew at a 3.2 percent annual rate, the Commerce Department said on Thursday, in line with economists' expectations.

While that was a slowdown from the third-quarter's brisk 4.1 percent pace, it was a far stronger performance than anticipated earlier in the quarter.

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It also was welcome news in light of a 0.3 percentage point drag from October's partial government shutdown and a much smaller contribution to growth from a restocking by businesses.

Earlier in the quarter, many economists were expecting a growth pace below 2 percent given that an inventory surge accounted for much of the increase in the July-September period.

Growth over the second half of the year come in at a 3.7 percent pace, up sharply from 1.8 percent in the first six months of the year. It was the biggest half-year increase since the second half of 2003.

"The clear message is that the economy entered into 2014 with a lot of momentum," said Carl Tannenbaum, chief economist at Northern Trust in Chicago.

U.S. stock index futures and the dollar held their gains after the data.

Consumer spending was the main driver of fourth-quarter growth, but there was also help from other segments of the economy such as trade and business investment.

The advance fourth-quarter GDP was released a day after the Federal Reserve said "growth in economic activity picked up in recent quarters."

The Fed on Wednesday announced another reduction to its monthly bond purchases and appeared to shrug off a surprise sharp slowdown in job growth in December.

Consumer spending rose at a 3.3 percent rate, the strongest since the fourth quarter of 2010. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, advanced at a 2 percent pace in the third quarter.

Businesses accumulated $127.2 billion worth of inventories, the most since the first quarter of 1998, adding 0.42 percentage point to GDP growth. Inventories had risen $115.7 billion in the third quarter, contributing 1.67 percentage points to output.

Excluding inventories, the economy grew at a 2.8 percent rate, up from the third-quarter's 2.5 percent rate.

SOLID FINAL DEMAND

The sturdy increase in demand should put the economy on a stronger growth path this year.

However, a lack of wage growth could take some edge off consumer spending early in the year.

A feared inventory correction, which did not materialize in the fourth quarter, is now likely to show up in the first three months of the year and weigh on growth, economists say.

In addition, business investment is expected to moderate, given a surprise tumble in orders for capital goods excluding defense and aircraft in December.

Even so, a lessening of the fiscal austerity that gripped Washington last year should keep the economy on a firmer growth path. Growth for the whole of this year is forecast at 2.9 percent, up from last year's 1.9 percent.

Wage growth has been stagnant as the economy deals with slack in the labor market. In a separate report, the Labor Department said first-time applications for state unemployment benefits rose 19,000 last week to 348,000.

Consumption in the fourth quarter came at the expense of saving.

The saving rate slowed to 4.3 percent in the fourth quarter from 4.9 percent in the prior period. Income at the disposal of households after accounting for inflation rose at a tepid 0.8 percent rate in the fourth quarter. That was a sharp slowdown from the 3.0 percent pace in the third quarter.

Sluggish wages kept inflation pressures benign in the fourth quarter. A price index in the GDP report rose at a 0.7 percent rate, decelerating from the third-quarter's 1.9 percent pace.

A core measure that strips out food and energy costs increased at a 1.1 percent rate after advancing at a 1.4 percent pace in the July-September period.

The economy in the last quarter also got a boost from exports, thanks to firmer global growth. Exports rose at their fastest pace in three years. That, together with declining petroleum imports narrowed the trade deficit. Trade contributed 1.33 percentage points to GDP growth.

Business spending on equipment accelerated at a 6.9 percent rate in the fourth quarter after rising at only a 0.2 percent pace in the prior three months.

There was a decline in business spending on nonresidential structures in the fourth quarter. A run-up in mortgage rates, which held back home sales and renovations, saw residential investment falling for the first time since the third quarter of 2010.

Government spending contracted at a 4.9 percent pace, reflecting a 16-day partial shutdown of the federal government in October. The Commerce Department said the shutdown had reduced GDP growth by 0.3 percentage point, through reduction in hours worked by federal employees.

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© 2014 Thomson/Reuters. All rights reserved.

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