WASHINGTON — The U.S. economy grew at a modest annual rate of 2.2 percent in the fourth quarter, less than half the third quarter's torrid 5 percent rate and weaker than the government first reported.
While the sharp slowdown seems troubling on the surface, economists say it's actually nothing to worry about. They remain optimistic that the country is finally emerging from years of sub-par activity and is on course this year for the strongest growth in a decade.
Here are five reasons why Friday's gross domestic product report showed that the economy is doing just fine:
The sizzling growth rate in the July-September quarter was never going to last. One-time factors, such as a 16 percent surge in federal defense spending, fueled the strongest acceleration in almost a dozen years. The third quarter growth followed a 4.6 percent jump in the second quarter, which was also misleading. That was credited to a robust rebound after harsh winter weather sent the economy into reverse in the first quarter. After such big swings, it's natural that economic growth would settle into a more sustainable pace.
—CONSUMER STILL KING
The centerpiece of the fourth quarter's growth was consumer spending, which expanded at a 4.2 percent rate. That was the strongest quarterly growth since early 2006. Consumers benefited from falling gas prices, which gave them more to spend on other items. Consumer spending accounts for 70 percent of economic activity, and economists said the solid performance in the final three months of the year was an encouraging sign going into 2015.
Another promising sign emerged from companies. Friday's report revealed that they increased investment spending to expand and modernize their facilities at a solid 4.8 percent rate in the fourth quarter. While that was down from the pace over the previous six months, it was a marked improvement over the government's first estimate that business investment had only risen at a 1.9 percent pace during the three-month period.
The robust upward revision eased concerns that businesses might cut back sharply on investment in the face of global economic weakness and a rising dollar, which hurts export sales. Moreover, one area of weakness in the government's report Friday — a slowdown in business stockpiling — may turn out to be a good thing for the future. Slower inventory building in the fourth quarter will mean that businesses will spend more in the coming months as they respond to rising demand. That should then lead to stronger factory production and ultimately, economic growth.
While GDP growth slowed in the fourth quarter, the job market was on a roll. The surge continued into January, giving the country the strongest pace of job creation in 17 years — job gains of 423,00 in November, 329,000 in December and 257,000 in January. Hopes for 2015 stem from the theory that strong job growth and falling unemployment will force employers to start boosting salaries to attract workers. The combination of more jobs and rising salaries is likely to fuel strong consumer spending this year.
—THE ROAD AHEAD
To be sure, not all the signals are flashing green. The GDP report showed that trade will likely weigh on the economy this year. Imports shot up at a much faster rate than exports, and the wider deficit subtracted 1.1 percentage points from fourth quarter growth. The stronger dollar makes imports cheaper and more attractive to U.S. consumers but dampens demand for U.S. exports. Housing has also lagged in the recovery, though it is expected to strengthen this year. A separate report Friday from the National Association of Realtors showed that the number of Americans signing contracts to buy homes rose at a healthy pace in January.
For the current January-March quarter, economists forecast GDP to grow at a pace of about 2.5 percent. They expect further strengthening as the year progresses. Many analysts believe growth for all of 2015 will top 3 percent, giving the country the strongest year since GDP grew 3.3 percent in 2005. That would represent a significant acceleration after average growth of just 2.2 percent over the past five years.
Analysts expect the Federal Reserve to respond later this year by raising rates from record lows near zero.