Economic growth slowed at the end of 2014, but robust consumer spending during the final quarter of the year, which is expected to continue as Americans enjoy the benefits of lower energy prices, suggested that the economy was likely to pick up speed again in 2015.þþAt 2.6 percent, the rate of growth in the final three months of the year was a significant downshift from the blistering 5 percent pace recorded in the third quarter, but is still considered relatively healthy.þþFor all of 2014, the economy grew at a rate of 2.4 percent, the Commerce Department reported Friday morning, roughly in line with the underlying trend of the last five years.þþBusiness investment slowed in late 2014, reversing strong gains in the previous two quarters. Many economists expect business spending to be lackluster in the coming months, hurt by deep cuts among drillers and other energy companies amid plunging oil prices.þþEconomists were looking for growth of just over 3 percent. A large part of the shortfall stemmed from the lower spending by the federal government, which tends to be volatile.þþOf that, military spending in particular was a major drag on the overall figure, subtracting about 0.4 percentage point from total growth.þþA weaker trade balance also caused the economy to cool slightly as 2014 came to a close. Imports, which subtract from the rate of expansion in gross domestic product, surged even as export gains slowed, a sign that economic weakness in Europe and other overseas markets was affecting American companies.þþBut consumer spending, which represents the bulk of economic activity, increased at a 4.3 percent rate in the final three months of 2014, the fastest quarterly increase since the first quarter of 2006.þþSince the beginning of December, gas prices have fallen by roughly 50 cents a gallon across the country to just over $2 a gallon. Although energy prices had been edging lower since the summer, the steepening drop is already translating into more optimism amid consumers, and further savings are expected.þþAnd with nearly 70 percent of gross domestic product coming from consumer spending, robust economic activity by individual Americans should more than make up for a more cautious stance on the part of companies over the coming year, experts said.þþ“The windfall to consumption from lower energy prices is showing up,” said Michael Gapen, chief United States economist at Barclays. “And we all know that over the long term, where the consumer goes, the economy goes.”þþ“The composition was what we thought: strong private consumption, modest growth in investment and drags from trade and government spending,ÿ Mr. Gapen added. “But I think the government spending drag is a one-off and there is tangible evidence that the consumer is in a much better place than in previous years.ÿþþLooking ahead, many economists expect 2015 to start off at about the pace of last quarter’s trend, with growth picking up over the course of the year.þþGuy Berger, United States economist at RBS, is looking for the economy to grow by about 2.7 percent in 2015. As was the case last quarter, he expects consumers to more than make up for whatever softness there is in spending by companies. þþ“Given the stronger job market, coupled with the equivalent of a huge tax cut from falling energy prices, healthier consumer spending will eventually boost the economy,” he said.þþThe announcement on Friday is the first of three estimates the government will make for economic growth in the quarter; it could be revised as more data comes in.þþIn a separate but closely watched announcement also released Friday morning, the Labor Department reported that its employment cost index rose 0.6 percent in December, about what was expected.þþThis quarterly survey of compensation costs is closely watched by the Federal Reserve, as well as many private economists, to gauge overall wage growth for American workers.þþEven though the unemployment rate has fallen, most workers have seen scant wage gains during the recovery of the last five and a half years. Last quarter’s figure follows a 0.7 percent increase in the previous two quarters, a sign that wages might be poised for a sustained increase.þþThis week, the Fed signaled it would not raise short-term interest rates before June, at the earliest. Although Fed policy makers have been encouraged by stronger hiring, they remain concerned about very weak inflation along with paltry wage gains.þþThe 0.6 percent rise in compensation costs was healthy, Mr. Berger said, but not big enough to persuade Fed policy makers to move up their expected rate increase. Mr. Berger and the team at RBS recently pushed back their prediction of Fed action to September 2015 from June, on the belief the Fed will need to see a bit more evidence of better trends before pulling the trigger.þþ“The window for data is closing in terms of June, which is why we pushed it back to September,” Mr. Berger said. “You will need to see these trends continue for a bit more before the Fed is convinced that the labor market is running out of slack.”þ
Source: NY Times
