Economic Watch: GDP Growth Slows, Consumer Sentiment Best in 11 Years

A first look at one of the widest measures of the U.S. economy shows activity cooled in the fourth quarter of 2014.

The gross domestic product, which is the value of all goods and services produced, increased at a annual rate of 2.6%, compared to a third quarter rate of 5%, according to the U.S. Commerce Department in the first of three monthly reports.

Consumer spending, which accounts for about two-thirds of all economic activity, increased at a 4.3% annual rate in the final quarter of last year, its best performance since the first quarter of 2006 and compares to a third quarter rate of 3.2%.

The overall GDP was brought down by lower business spending on equipment, which fell at an annual rate of 1.9% in the fourth quarter, its biggest drop since the second quarter of 2009.

For all of 2014 the GDP increased 2.4%, the most in four years, and compares to a 2.2% gain in 2013.

Behind the numbers

“The underlying momentum of the U.S. economy slowed noticeably at year-end,” said Lindsey Piegza, chief economist at the investment firm Sterne Agee. “As expected, government spending slowed after an outsized rise the quarter before and export demand cooled amid a rising U.S. dollar, however, inventories remained strong at year-end, suggesting the eventual pullback in the first half of 2015 is likely to be an even larger drag than previously anticipated.”

She said businesses remain sidelined with minimal investment and are still cautious regarding the sustainability of the U.S. recovery, a declining trend expected to slow further in the first half of the current year as capital expenditure is expected to wane in the domestic energy sector amid sustained, low prices.

“Without business spending, hiring and income growth are unlikely to gain any additional ground in the near-term,” Piegza said. “Thus, while consumers were able to maintain an arguably heightened level of spending through the end of the year thanks to price reprieve at the pump, that additional spending power is hardly a supplement for a continuing lack of income growth and earnings opportunity.”

Looking ahead, with the underlying momentum in the economy around a 2% annual pace, she said the Federal Reserve is now presented with yet another barrier to a near-term rate interest rate increase, despite earlier talk that it was considering a hike around mid-year.

Consumer Sentiment

Meantime, a separate report shows consumers are increasingly feeling better, with the University of Michigan Consumer Sentiment Index hitting its highest level in 11 years.

Final results for January show it increased 4.8% in January from December to 98.1, but down slightly from an earlier, preliminary reading of 98.2 for the month. The level is nearly 21% higher than the same time a year earlier.

“The improvement was due to consecutive gains in each of the past six months, with the Sentiment Index improving by 20% since July of 2014. Importantly, the gains in the past half-year were as large among households with incomes under $75,000 as over that amount,” said Richard Curtain, chief economist for the Survey of Consumers.

He said half of all consumers expecting the economic expansion will continue for another five years. The survey also showed by monthly and year-over-year gains in consumer’s assessment of current economic conditions and their future expectations.

“The anticipated strength in the overall economy has been accompanied by more favorable income and employment expectations. While renewed strength in consumer spending will boost the pace of economic growth in 2015, most consumers are counting only on modest income gains during the years ahead,” Curtain said.

He cautioned without sufficient wage gains, consumers will be forced to demand large price discounts to complete their purchases, adding to disinflationary pressures, “but overall, the more optimistic data indicates that total real personal consumption expenditures will grow at 3.3% during 2015.”