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US economy is expected to strengthen after weak 4th quarter

WASHINGTON – The U.S. economy struggled to grow in the October-December quarter as consumer spending, business investment and exports slowed. Yet despite global weakness and shrunken oil and stock prices, many economists expect growth to accelerate on the strength of healthy job gains.

The economy grew at an annual rate of just 0.7 per cent last quarter, less than half the 2 per cent growth rate in the July-September period, the government said Friday. It was the worst showing since a severe winter slowed the economy, as measured by the gross domestic product, to a 0.6 per cent annual growth rate in last year’s first quarter.

Though the slowdown late last year could renew doubts about the durability of the 6 1/2-year-old economic expansion, most analysts said they expected the slump to be short-lived.

“The weak growth is temporary,” said Nariman Behravesh, chief economist at IHS Global Insight. “This is not an early warning of something worse.”

Behravesh said two of the key negative factors last quarter — an effort by companies to pare an overhang of unsold goods and investment cutbacks by oil companies facing much lower energy prices — would likely diminish early this year. That would pave the way for decent annual growth of around 2.5 per cent in the first half of 2016, Behravesh said.

Paul Ashworth, chief economist at Capital Economics, said he thinks GDP growth will rebound to an annual rate between 2.5 per cent and 3 per cent in the first six months of 2016 as further solid job growth fuels additional consumer spending. Consumer spending accounts for about 70 per cent of economic activity.

Much of last quarter’s weakness reflected a slowdown in consumer spending, which grew at a 2.2 per cent annual rate, compared with a 3 per cent rate the previous quarter. Analysts said part of that weakness likely reflected a warmer-than-normal December, which reduced spending on winter clothing and utility bills.

Friday’s estimate of fourth-quarter growth was the first of three that the government will issue.

Besides consumer spending, exports were a source of weakness last quarter. That reflected in part a stronger dollar, which has made U.S. goods pricier and therefore less competitive overseas. Persistent sluggishness in such key export markets as China and Europe hurt, too. A wider U.S. trade deficit cut annual growth last quarter by 0.5 percentage point.

An additional drag came from cutbacks in business investment spending, which fell at a 1.8 per cent annual rate, with spending on structures down 5.3 per cent. That reflected a 38.7 per cent plunge in spending in the oil and gas industry, which has slashed drilling and exploration in response to the plunge in oil prices.

Besides pulling back on investment, businesses cut spending on stockpiles to try to pare unwanted inventories. That effort reduced growth by 0.5 percentage point in the fourth quarter. But some economists said they thought the broad effort by businesses to trim stockpiles was nearing an end.

Home construction was one of the bright spots in the fourth quarter; it grew at a solid 8.1 per cent annual rate. The U.S. housing market has remained solid.

Government spending slowed to growth of just 0.7 per cent. Spending by the federal government grew at a 2.7 per cent annual rate, while state and local governments cut back on spending at a rate of 0.6 per cent.

For all of 2015, the economy grew 2.4 per cent, matching the growth in 2014. Both years improved on 2013. Still, last year’s growth rate extended the economy’s pattern of subpar expansion since the Great Recession officially ended in June 2009.

For 2016, economists have forecast another year of modest growth of around 2 per cent to 2.5 per cent. At the same time, they have nudged up the likelihood of another recession, given the stock market plunge that began the year, sharply diminished energy prices and China’s struggling economy, the world’s second-largest.

A possible recession beginning this year is put at a still-low 20 per cent. Most analysts say the most likely outcome is for steadily strengthening growth as consumers benefit from rising employment.

“Consumer spending and housing remain solid, thanks to good fundamentals, including steady job gains, rising wages and low interest rates,” said Gus Faucher, senior economist at PNC.

Faucher predicts that the economy will generate job gains this year averaging around 180,000 a month, which he thinks would be enough to lower the unemployment rate to 4.7 per cent by year’s end from 5 per cent now.

This week, the Federal Reserve issued a cautious assessment of the economy. The Fed left interest rates unchanged after having raised its benchmark short-term rate in December from record lows.

Many analysts think that subpar inflation and global pressures will cause the Fed to slow its pace of rate hikes this year from what had been expected to be four increases to perhaps only two.