The U.S. economy decelerated in the final three months of 2014 but still grew at an annualized rate of 2.6 percent, the Commerce Department said Friday in a report that had encouraging signs about consumers and prospects for this year.
While respectable, the fourth-quarter growth came on the heels of a prior quarter that saw growth revised up to a scorching 5 percent. That and a bevy of solid economic data late last year had led economists to expect quarterly growth in the 3 percent range or greater.
“I think the top-line number was disappointing,” said Gus Faucher, a senior economist with PNC Financial Services in Pittsburgh. “It wasn’t a bad number. It just wasn’t as good as what we’ve seen in recent quarters.”
Even the White House gave a subdued thumbs up. Jason Furman, head of the White House Council of Economic Advisers, nodded to improving consumption in his blog, adding that the report “affirms the underlying pattern of resurgence in the economy.”
Deeper in the quarterly report, and in other economic indicators released Friday, there were encouraging signs that the U.S. consumer, who drives about two-thirds of U.S. economic activity, is back.
“I think that consumers are going to be in a good mood for 2015,” Faucher said.
The University of Michigan released its monthly gauge of consumer sentiment on Friday, finding that in January more consumers expected the economy to expand and create new jobs than at any time since January 2004. The data, said the report, suggest consumption spending will grow 3.3 percent this year.
“Consumers expect the renewed economic strength to create more jobs, but the only boost to their discretionary incomes has been due to falling oil prices,” said Richard Curtin, the economist directing the report. “Consumers have now turned to wages rather than jobs as the primary characteristic they use to judge the performance of the economy.”
On that score things are getting better, albeit slowly.
The Labor Department released its employment-cost index on Friday, and it showed that employment costs rose 2.2 percent over the past 12 months, up three ticks from 1.9 percent in 2013. It means employees are enjoying more income and/or benefits, although the number is below the 3 percent to 4 percent growth in compensation in past economic expansions.
Similarly, the quarterly economic-growth report from the Bureau of Economic Analysis, part of the Commerce Department, said real personal consumption spending increased 4.3 percent in the final three months of 2014. That was an acceleration from the 3.2 percent increase in the third quarter, when economic growth sizzled at 5 percent. For the full year, consumption spending grew by 2.5 percent, up a tick from 2.4 percent a year earlier.
Together, the two trends of rising compensation and spending point to stronger consumption as more people are working, are making a bit more and falling gasoline prices have left more money in their wallet.
“Consumers are benefiting from a number of powerful economic tailwinds, including the steadily improving job market, the collapse in oil prices, record high stock prices, and record low debt service burdens,” said Mark Zandi, chief economist for forecaster Moody’s Analytics, adding that consumers “will provide an outsized contribution to overall economic growth this year.”
For all of 2014, the economy grew at a rate of 2.4 percent, better than the 2.2 percent growth posted in 2013. Friday’s weaker than expected number is likely to be revised upward on Feb. 27, given the sharp revisions to third-quarter growth. Friday’s report was the first estimate of growth, made with incomplete quarterly data. Two more revisions follow, giving a more complete picture of economic activity during the quarter.
One trend to watch in 2015 is what happens with imports, which subtract from gross domestic product, the sum of U.S. goods and services. Europe’s ongoing debt crisis and the strengthening U.S. economy have led the euro and other major currencies to weaken against the U.S. dollar. A strong dollar makes U.S. exports more expensive abroad, and importantly makes products from other countries cheaper here.
“The rise in imports was driven especially by a rise in imports of consumer goods, and is a direct consequence of a strong dollar, and the strong consumer spending environment,” Doug Handler, chief U.S. economist for forecaster IHS Global Insight, said in an investment note. “Overall, imports of goods subtracted . . . from the 2.6 percent bottom line. That is, had goods imports remained flat from the third quarter level, real GDP growth would have been 3.9 percent.”
Growth in the final months of 2014 also would have been stronger if not for a drop in defense spending, which brought down overall government spending in the quarter after rising sharply in the prior three months.
Defense spending fell 6.6 percent over the full year in 2014, and 12.5 percent in the final three months, after jumping up 16 percent in the third quarter of 2014.