Strong household spending and robust 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 in the final three months of last year, 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 had been anticipated earlier in the quarter and welcome news in light of
some drag from October’s partial government shutdown.
“The economy was firing on almost all cylinders as 2013 came to a close. For today, the sun is out and shining,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi
UFJ in New York.
Early 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.
Taking both quarters together, growth came 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 gain since the second half of 2003.
Consumer spending was the main driver of fourth-quarter growth, but there was also a strong boost from trade. Business investment also lent support as did the restocking of warehouses, but not at the same scale as in the third quarter.
The report was released a day after the Federal Reserve announced another reduction to its monthly bond purchases and shrugged off a surprisingly sharp slowdown in job growth in December.
“If this keeps up, the Fed will have to consider speeding up its too-slow exit strategy,” said Rupkey.
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.
Some economists said solid consumer spending likely encouraged businesses to continue accumulating stocks.
Inventories increased $127.2 billion, the most since the first quarter of 1998. That added 0.42 percentage point to GDP growth. Inventories had risen $115.7 billion in the third quarter, contributing 1.67 percentage points to output.
“We have not seen this level of back-to-back strength in some time. I would say this is the strongest signal that
consumption will continue to grow in coming quarters,” said Tim Hopper, chief economist at TIAA-CREF in New York.
Excluding inventories, the economy grew at a 2.8 percent rate, up from the third-quarter’s 2.5 percent rate.
The sturdy increase in demand should put the economy on a stronger growth path this year. However, anemic wage growth could take some edge off consumer spending early in the year.
In addition, some economists view the current level of inventories as unsustainable and expect a correction beginning in the first quarter. In addition, business investment could cool off after a surprise tumble in orders for capital goods excluding defense and aircraft in December.
The strong performance from trade is also unlikely to be repeated as slowing growth in China is expected to curb exports, while firming domestic demand will suck in imports.
Even so, a lessening of the fiscal austerity that gripped Washington last year should keep the economy on a firmer growth path this year. Economists expect growth this year of 2.9 percent, up from last year’s 1.9 percent.
“We do not expect another large contribution from trade, inventories have reached levels that are unlikely to be maintained, and private domestic demand shows slightly less momentum,” said Peter D’Antonio, an economist at Citigroup in New York.
“Nevertheless, we anticipate that the underlying path of growth will continue to strengthen toward the 3 percent range for all of 2014.”
Slack in the labor market has restrained wage growth. In a separate report, the Labor Department said new 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. That was a sharp slowdown from the 3.0 percent pace in the third quarter.
“Income growth remains the biggest constraint to growth. We will not achieve sustainable strong growth unless wage growth picks up,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.
Sluggish wages kept inflation pressures benign. 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.
Exports rose at their fastest pace in three years. That combined with declining petroleum imports to narrow 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. But here was a decline in business spending on nonresidential structures.
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. Home sales have been on the back foot in recent months and that trend is likely to persist for a while as the market adjusts to higher loan rates.
A third report showed contracts to buy previously owned homes tumbled 8.7 percent in December to a two-year low.
Government spending contracted at a 4.9 percent pace,reflecting the 16-day partial shutdown of the federal government in October and a plunge in defense spending. The Commerce Department said the shutdown sliced 0.3 percentage point off of GDP growth through reduced hours worked by federal employees.(Reuters)