US economic growth slowed in the fourth quarter, as weaker business spending and lower inventories weighed on economic activity despite a strong uptick in consumer spending.
US gross domestic product expanded at an annual rate of 2.2 percent in the final quarter of last year, unrevised from the previous estimate, the Commerce Department reported on Friday. The government’s third and final estimate of GDP is considered the most complete.
The economy had expanded at an annual rate of 5 percent in the third quarter following an increase of 4.6 percent in Q2, capping off the strongest six-month expansion in more than a decade.
Consumer spending, which accounts for nearly 70 percent of US economic activity, increased 4.4 percent in the fourth quarter, up from the previous estimate of 4.2 percent. That was the largest increase since 2006. However, the latest evidence suggests consumer spending was declining in the first quarter, as inclement weather and rising debt burdens weighed on retail spending. Retail sales declined 0.6 percent in February, the third consecutive monthly drop.
The government downgraded its estimate of business inventories to $80 billion from $88.4 billion, which helped keep the final Q4 tally unchanged. Inventories subtracted 0.1 percentage point from GDP growth in the fourth quarter, official data showed.
Business spending on equipment was revised down to reflect a 0.6 percent growth rate rather than the previously estimated 0.9 percent.
Global exports were revised higher, despite a volatile global economy. However, imports rose faster than previous expected. As a result, international trade shaved 1.03 percentage points off GDP.
The US economy is forecast to grow between 2.3 percent and 2.7 percent in 2015, according to revised estimates from the Federal Reserve. The Fed had previously forecast a growth rate of up to 3 percent this year.
The markets are confident the economy is growing fast enough to warrant a rate hike this year, although the exact pace and timing is unknown. Analysts are growing more convinced that a rate hike is unlikely before September. Given the central bank’s latest “dot plot” chart for the federal funds rate, any future increase in interest rates will be slow and steady. The median estimate of the federal funds rate for the end of 2015 is 0.625 percent, down significantly from the previous estimate of 1.125 percent.
Based out of Toronto, Canada, Husni Sam Borji is senior macroeconomics analysts who contributes regularly to TradersDNA, where he examines the global financial markets. Husni Sam has authored dozens of government reports and industry whitepapers, as well as thousands of financial articles. Husni Sam holds a BA from the University of Windsor and a Master’s degree in Economic Public Policy from McMaster University.
His expertise includes macroeconomics, fundamental analysis, industry research and global political economy.