Economy in US expanded less than forecast in Q4

[WASHINGTON] The economy in the US expanded at a slower pace than forecast in the fourth quarter as cooling business investment, a slump in government outlays and a widening trade gap took some of the luster off the biggest gain in consumer spending in almost nine years.

Gross domestic product grew at a 2.6 per cent annualised rate after a 5 per cent gain in the third quarter that was the fastest since 2003, Commerce Department figures showed Thursday in Washington. The median forecast of 85 economists surveyed by Bloomberg called for a 3 per cent advance. Consumer spending, which accounts for almost 70 per cent of the economy, climbed 4.3 per cent, more than projected.

Swept up by the cheapest gasoline in years and the biggest employment increase since 1999, households are gaining the confidence to spend more freely, which will bolster the odds the world's biggest economy can escape a global slowdown unscathed. Engaged consumers will help ensure that most American employers will look to expand, even as the decline in oil hurts companies such as Caterpillar Inc.

"Consumers are feeling pretty good about their wallets and where things are headed, and that means a lot," Bricklin Dwyer, an economist at BNP Paribas in New York, said before the report. "It's businesses vs. consumers that is telling the story of what's happening in the economy, and ultimately we think the consumer side is most important." GDP estimates in the Bloomberg survey of economists for fourth-quarter GDP, the value of all goods and services produced, ranged from 1.8 per cent to 3.6 per cent. The GDP estimate is the first of three for the quarter, with the other releases scheduled for February and March when more information becomes available.

The gain in household consumption was the biggest since the first quarter of 2006 and compared with a 4 per cent median forecast in the Bloomberg survey. It followed a 3.2 per cent advance from July through September. Purchases added 2.9 percentage points to growth.

For all of 2014, the U.S. economy grew 2.4 per cent from the year before, the most in four years and following a 2.2 per cent advance in 2013. Consumption climbed 2.5 per cent, the most since 2006.

For the fourth quarter, fixed business investment increased at a 2.3 per cent annualised rate, compared with a 7.7 per cent gain in the third quarter. Corporate spending on equipment dropped at a 1.9 per cent pace, the biggest decline since the second quarter of 2009.

The trade deficit widened to US$471.5 billion, as imports climbed three times faster than exports. The gap subtracted 1 percentage point from GDP.

A surge in inventories helped make up for some of the shortfall in trade. Stockpiles grew at a US$113.1 billion rate, an increase of US$30.9 billion from the third quarter, adding 0.8 percentage point to growth.

The GDP report also showed government spending decreased at a 2.2 per cent pace, subtracting 0.4 percentage point to overall growth as defense spending slumped by the most in two years.

Federal Reserve policy makers are monitoring economic progress as they weigh their first interest rate increase since 2006. In a statement following a meeting this week, the central bank acknowledged global risks, saying that it will take into account readings on "international developments" as it decides how long to keep rates low.

Meanwhile, US "economic activity has been expanding at a solid pace," the Fed said in the statement as it maintained its pledge to be "patient" on raising interest rates. "Labour market conditions have improved further, with strong job gains and a lower unemployment rate."

Companies and consumers will need more evidence the U.S. economy can sustain its momentum in the face of global headwinds, which include a plunge in commodity prices and the threat of deflation in Europe.

The cost of oil had dropped almost 60 per cent since last year's peak, resulting in a financial windfall for consumers as gas prices also declined. A regular gallon of gasoline cost an average US$2.05 as of January 29, hovering near the lowest level since March 2009.

That's being reflected in consumer confidence. The University of Michigan preliminary consumer sentiment index for January rose to an 11-year high while the Conference Board's measure increasing to the highest level since August 2007.

While the gas-fueled confidence kicks may encourage households to spend more, the decline in oil prices has pinched companies such as Caterpillar.

The Peoria, Illinois-based machinery manufacturer said lower oil and gas prices are "without a doubt" the biggest reason it's expecting sales to decline to US$50 billion in 2015, Michael DeWalt, Caterpillar's vice president of finance services, said on a Janaury 27 conference call. The median estimate from analysts' had projected revenue of US$55.2 billion. "With oil this low, we expect substantial reductions" in spending by fuel producers, he said.

The labour market has yet to show any signs of slowing. Employment grew in 2014 by almost 3 million, the most in any year since 1999, Labor Department data showed this month.

Those gains are helping worker pay grow. After-tax personal income adjusted for inflation climbed at a 3.8 per cent annualised rate in the fourth quarter, the most since mid 2013.

One reason earnings are growing more quickly is that inflation is tame. The price index tied to consumer spending dropped at a 0.5 per cent rate in the fourth quarter, the most in almost six years. Excluding food and fuel, it rose 1.1 per cent, the smallest gain since the second quarter of 2013.

Fed policy makers and economists alike are watching for signs that the improved labour market is translating into wage gains, which have been slow to materialise throughout the recovery. The employment cost index, which includes wages and benefits, climbed 0.6 per cent in the last three months of 2014 compared with a 0.7 per cent gain in the previous three months, a Labor Department report showed Friday. Wages climbed 0.5 per cent, the least since the first quarter of 2014.

BLOOMBERG