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Economy in U.S. Expanded at 2.2% Pace in Fourth Quarter

Bloomberg, Mar 27, 2015

The U.S. economy expanded at 2.2 percent annualized pace in the fourth quarter, led by the biggest gain in consumer spending in eight years.

The revised increase in gross domestic product, the value of all goods and services produced, matched the Commerce Department’s previous estimate, according to figures issued Friday in Washington. The report also showed corporate profits dropped in the last three months of the year, capping the worst annual performance since the recession.

The rate of economic growth will prove hard to replicate this quarter as harsh winter weather, a stronger dollar, a port slowdown and a global oil glut translate into disappointing spending on the part of consumers and businesses. Job growth — one of the few economic indicators that charged ahead unabated in the first quarter — will probably help support demand in the world’s biggest economy for much of the year.

“The consumer is still going to hold up,” said Jacob Oubina, a senior U.S. economist at RBC Capital Markets LLC in New York, which correctly forecast GDP. “As we look toward the middle of the year, you have a consumer that continues to see aggregate income growth.”

Stock-index futures were little changed, after equities’ longest losing streak in 10 weeks. The contract on the Standard& Poor’s 500 Index maturing in June fell 0.1 percent to 2,046.9 at 8:51 a.m. in New York.

Survey Results

The median forecast of 83 economists surveyed by Bloomberg called for growth of 2.4 percent. Projections ranged from 1.8 percent to 2.7 percent. This is the final of three estimates for the quarter.

An upward revision to consumer spending and exports was mostly offset by smaller gains in inventories, the report showed.

For all of 2014, the U.S. economy grew 2.4 percent from the year before, the most since 2010 and following a 2.2 percent advance in 2013.

Household consumption, which accounts for almost 70 percent of the economy, was revised up to show a 4.4 percent gain at an annualized rate in the fourth quarter, the most since the first three months of 2006. It was previously estimated at 4.2 percent. The update reflected bigger outlays on health care.

For all of 2014, Consumer spending rose 2.5 percent, the most since 2006.

Corporate Profits

The Commerce Department’s report also included data on fourth-quarter corporate profits. Before-tax earnings fell 1.4 percent after rising 3.1 percent in the previous three months, depressed by declines among financial institutions and foreign affiliates.

“We continue to see this divergence between a real healthy U.S. domestic backdrop despite a global economy that as we know in the second half of last year was weakening significantly,” said Oubina, referring to the drop in profits from overseas.

A 4 percent gain at an annualized rate in personal income made up for the drop in corporate earnings and helped propel gross domestic income up by 3.1 percent.

For all of 2014, corporate profits were down 0.8 percent, the first decrease since 2008. The outlook for 2015 has dimmed with the jump in the dollar.

A stronger currency is more likely to “impact profits this quarter and through this year rather than happening almost in real time,” Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, said before the report.

Bad Weather

Bad weather and the stronger dollar are having an impact this quarter. Francesca’s Holdings Corp., which operates a women’s boutique, is among companies saying the harsh winter has depressed revenue.

While the Houston-based company posted sales and adjusted earnings that surpassed analysts’ estimates in the quarter ended in January, demand since was hit by “a weather impact during really February or late February and early March,” Chief Executive Officer Michael Barnes said on a March 25 conference call. “It was very bad last year in 2014, but this year actually proved slightly worse.”

Retail sales unexpectedly dropped 0.6 percent in February, a third consecutive decline, according to figures issued by the Commerce Department this month. Auto dealers, building-material outlets and department stores were among the merchants that suffered through record cold and snow in parts of the Northeast and Midwest.

Construction, Manufacturing

Construction also has been hurt by the weather, while manufacturing has struggled as the rising dollar restrains exports and the plunge in oil prices limits investment in energy-related industries.

Builders began work in February on the fewest houses in a year, and orders for durable goods such as machinery and electronics sank.

Economists at JPMorgan Chase & Co. and Macroeconomic Advisers were among those who lowered their tracking estimates for first quarter GDP after Wednesday’s durable goods report. Michael Feroli, JPMorgan’s New York-based chief U.S. economist lowered his growth forecast to a 1.5 percent pace from 2 percent, while Macroeconomics downgraded its projection to 1.4 percent from 1.5 percent.

The Federal Reserve Bank of Atlanta’s GDP forecasting model is so far projecting a 0.2 percent growth rate, which would be the weakest since cold winter weather sent the economy to contract a year ago. The median of 76 economists projected first-quarter growth of 2.2 percent as of a survey by Bloomberg News published March 12.

Fed Projections

Fed policy makers are keeping an eye on employment and inflation as they consider raising interest rates this year. Officials cut their economic growth estimates for this year and the next two, according to the FOMC’s quarterly Summary of Economic Projections.

They also slashed their median estimate for the federal funds rate at the end of 2015 to 0.625 percent, compared with 1.125 percent in December forecasts. Atlanta Fed President Dennis Lockhart and Chicago Fed chief Charles Evans, both of whom vote on policy this year, acknowledged last week that a stronger dollar was a headwind for growth.

The biggest impact from the swing in the currency will probably be on trade as an appreciating dollar makes it difficult for some American producers to sell their goods to foreign buyers, who may consider buying cheaper products elsewhere. At the same time, it also makes it less expensive for U.S. consumers to buy imported goods, giving U.S. companies even more competition.

A smaller gain in inventories last quarter mostly offset the revision to consumer spending, leaving GDP the same as in the prior estimate. Stockpiles rose at an $80 billion annual rate, compared with a prior estimate of $88.4 billion.