U.S. economy hits the brakes in fourth quarter, GDP at tepid 0.7%

The U.S. economy decelerated in the fourth quarter of 2015 thanks to less spending by consumers, a slowdown in local and state government outlays and tepid capital investments by American businesses.

Real gross domestic product – the value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production, adjusted for price changes – increased at a modest rate of 0.7% in the fourth quarter of 2015, well below the GDP growth of 2.0% in the previous quarter, according to the “advance” Gross Domestic Product (GDP) estimate released Friday (Jan. 29) by the Bureau of Economic Analysis.

The advance fourth quarter GDP estimate, which is the first of three estimates by the Department of Commerce’s BEA research group, came in three percentage points below the latest GDPNow model forecast of 1% by the Atlanta Federal Reserve on Thursday.

According to the BEA, “advance” estimates, based on source data that are incomplete or subject to further revision by the BEA, are released near the end of the first month following the end of the quarter. As more detailed and more comprehensive data becomes available, “second” and “third” estimates are released near the end of the second and third months, respectively.

U.S. PRODUCT SALES SLIP, MARKET ‘TURBULENCE’
Gad Levanon, managing director of the macroeconomic and labor market research at the Conference Board, said the 0.7% annualized growth in real GDP fell short of consensus expectations.

“As expected, the slow growth in GDP was partly a result of slower inventory buildup and negative exports, although final sales of domestic products also disappointed, growing by just 1.2%,” Levanon said.

The conference board economist also said recent turbulence in financial markets increased uncertainty regarding future economic conditions, and could hurt business confidence and further slow investment growth in the beginning of 2016.

“But the most likely scenario is for solid employment growth, the improving housing market, higher consumer confidence and more government spending to offset the headwinds from the ongoing dollar appreciation and the slow global economy, and lead to GDP growth of about 2% for the year as a whole in 2016,” Levanon explained.

As noted by the Conference Board, which produces the highly-watched monthly consumer confidence index, the decelerating in US. GDP growth in the second half of 2015 is a far cry from the robust acceleration of 3.9% that the nation’s economy experienced in the second quarter.

It also the first snapshot of how well the U.S. economy is doing since the Federal Reserve announced a small rate hike from 0.25% to 0.5% on Dec. 16, ending almost seven years of a near-zero % rate and raising interest rates for the first time in nine years.

FED MAINTAINS MONETARY POLICY ON WEAK GDP GROWTH
At the Federal Open Market Committee’s (FOMC) first meeting of 2016 on Wednesday, Federal Reserve Chair Janet Yellen acknowledged that economic growth slowed late last year. Given that economic outlook, the FOMC decided to maintain the target range for the federal funds rate the 0.25% to 0.5% range.

“The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 % inflation,” Yellen said in a statement.

Further, the Fed chief said the committee expects economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.

“The federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run,” Yellen said. “However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

Following are other highlights of the fourth quarter advance GDP report.
• Real gross domestic purchases – consumption by U.S. residents of goods and services wherever produced – increased 1.1% in the fourth quarter, compared with an increase of 2.2% in the third.

• The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 0.2% in the fourth quarter, compared with an increase of 1.3 % in the third. Excluding food and energy prices, the price index for gross domestic purchases increased 0.9%, compared with an increase of 1.3%.

• Current-dollar GDP – the market value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production – increased 1.5%, or $68.1 billion, in the fourth quarter to a level of $18.1 trillion. In the third quarter, current-dollar GDP increased 3.3%, or $146.5 billion.

• Current-dollar personal income increased $137.1 billion in the fourth quarter, compared with an increase of $190.8 billion in the third. The deceleration in personal income primarily reflected a downturn in personal interest income and decelerations in wages and salaries and in farm proprietors’ income.

• Personal current taxes increased $25.8 billion in the fourth quarter, compared with an increase of $22.3 billion in the third.

• Disposable personal income increased $111.3 billion, or 3.3%, in the fourth quarter, compared with an increase of $168.5 billion, or 5.1%, in the third. Real disposable personal income increased 3.2%, compared with an increase of 3.8%.

• Personal outlays increased $72.6 billion in the fourth quarter, compared with an increase of $131.7 billion in the third. Personal saving – disposable personal income less personal outlays – was $739.3 billion in the fourth quarter, compared with $700.6 billion in the third.

• The personal saving rate – personal saving as a percentage of disposable personal income – was 5.4% in the fourth quarter, compared with 5.2% in the third.

According to the BEA, the second and third GDP estimates will be released on Feb. 26 and March 25. The final revision will include additional data on fourth quarter and yearly earnings on U.S. companies. The GDPNow forecast for first-quarter GDP growth will be released on Monday (Feb. 1) by the Atlanta Fed.