Economy slows to 1.4% GDP growth in 4Q, nation’s economic picture still unclear

The U.S. economy is still performing well short of expectations as the nation’s Gross Domestic Product activity only grew at a weak 1.4% in the fourth quarter of 2015, according to the “third” and final (GDP) estimate released Friday (March 25) by the Bureau of Economic Analysis.

Economists surveyed by the Wall Street Journal expect no change to last month’s measure, which tracks the value of the goods and services produced by the U.S. economy in a given time period. Fourth quarter GDP was revised upward from the preliminary reading in January, to 1% percent from 0.7%.

Still, the year-ending GDP growth is significantly weaker than the second and third quarter of 2015, when the nation’s economic activity increased at an annual rate of 3.8% and 1.9%, respectively. Last week, CEO expectations on the economy remained mixed for the fourth quarter in a row, indicating an economy performing below its potential, according to the Business Roundtable first quarter 2016 CEO Economic Outlook Survey.

“Mixed expectations for near-term sales, investment, hiring and growth point to an economy that continues to lack momentum,” said Doug Oberhelman, Chairman and Chief Executive Officer of Caterpillar Inc. and Chairman of the Business Roundtable. “These results only reinforce the need for Congress and the Administration to act this year to enact policies that boost job creation and economic growth, such as quickly ratifying the TPP, modernizing America’s outdated business tax system, and embracing a smart regulatory environment.”

According to Department of Commerce officials, the increase in real GDP in the fourth quarter reflected positive contributions from personal consumption expenditures (PCE), residential fixed investment, and federal government spending that were partly offset by negative contributions from nonresidential fixed investment, exports, private inventory investment, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased.

The deceleration in real GDP in the fourth quarter primarily reflected downturns in nonresidential fixed investment and in state and local government spending, a deceleration in PCE, and a downturn in exports that were partly offset by a smaller decrease in private inventory investment, a downturn in imports, and an acceleration in federal government spending.

The GDP report also follows last week’s decision by the Federal Open Market Committee (FOMC) to maintain federal funds rates at 0.25% to 0.5%, with Fed Chair Janet Yellen calling the nation’s current hawkish monetary policy “prudent” given the state of the U.S. economy.

“This decision partly reflects the implications for the U.S. economy,” Yellen said. “Proceeding cautiously … in the policy of accommodation at this time will allow us to verify that the labor market continuing to strengthen despite the risk from abroad. Such caution is appropriate given the short-term interest rates will stay near zero, which means that monetary policy has greater scope to respond to upside and downside changes in the outlook.”

In determining the timing and size of future adjustments to the target range for the federal funds rate in the future, Yellen said the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2% inflation target.

“This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments,” the Fed chairwoman said. “The committee expects that economic conditions will evolve in a manner that will warrant any gradual increase in the federal funds rate.

2016 GDP FORECASTED AT 2.4%, SAME AS 2014 AND 2015

Looking ahead at real GDP growth for 2016, several economic forecasters are now walking back their previous GDP estimates for 2016. In their second estimate of real GDP growth for 2016, the Business Roundtable CEOs now expect 2.2% growth, down from their 2.4% estimate at the end of 2015. Real GDP increased 2.4% in 2015, the same as in 2014.

According to the BEA, the “advance” GDP estimates for the first quarter of 2016 will be released on April 28. On Thursday (March 24), The Atlanta GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2016 was lowered to 1.4%, down from 1.9% on March 16.

“After this morning’s durable goods manufacturing report from the U.S. Census Bureau, the forecast for first-quarter real equipment investment growth declined from 0.9% to -1.4% while the forecast for the change in inventory investment in 2009 dollars declined from -$9 billion to -$11 billion,” said Atlanta Fed economist Pat Higgins, creator of the GDPNow weekly survey.

Still, the Atlanta Fed’s GDP-based recession indicator index rose a little with the latest GDP figures, and currently stands at 10%. Although the fourth-quarter GDP report was weak, a value of 10% is still very low, and the inference from the most recent data is that the U.S. economy is still in an expansion phase. According to the index, the U.S. will have entered a recession when the index rises above 67%.

Following are other highlights of the final fourth quarter GDP report.

· Real gross domestic purchases – purchases by U.S. residents of goods and services wherever produced – increased 1.5% 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 0.4% 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 1.0%, compared with an increase of 1.3% in the previous quarter.

· 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 2.3%, or $104.6 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.

· Profits from current production (corporate profits with inventory valuation adjustment) capital consumption adjustment decreased $159.6 billion in the fourth quarter, compared with a decrease of $33.0 billion in the third.

· Profits of domestic financial corporations decreased $24.0 billion in the fourth quarter, in contrast to an increase of $1.8 billion in the third. Profits of domestic non-financial corporations decreased $129.2 billion, compared with a decrease of $11.8 billion. The rest-of-the-world component of profits decreased $6.5 billion, compared with a decrease of $23.1 billion in the third quarter.

· Taxes on corporate income decreased $32.2 billion in the fourth quarter, compared with a decrease of $6.9 billion in the third. Profits after tax with decreased $127.4 billion, compared with a decrease of $26.2 billion in the third quarter. Dividends decreased $15.1 billion in the fourth quarter, in contrast to an increase of $26 billion in the third.