Economy Grows At Anemic 0.7% In Final Quarter Of 2015
An anemic end to 2015 raises concerns about the health of the economy going forward.
Ordinarily, the fourth quarter of the year is one in which the economy does fairly well, even in years in which the economy overall is somewhat weak. Businesses spend a little extra to get money off the books prior to the end of the year for tax purposes, and, of course, consumers generally open up their pocketbooks for holiday spending that is often aided by employer-provided holiday bonuses. This year, consumers and businesses also likely found themselves with extra money to spend thanks to the fact that fuel and energy costs were down significantly due to the fall of the costs of oil and gas, and the somewhat unusually warm start to winter meant that heating costs were likely below normal. Despite all of that, though, the initial report about Gross Domestic Product grown for September through January revealed a weaker economy than might ordinarily be expected, and that raises questions about the state of the economy headed into 2016:
The American economy barely grew last quarter, finishing the year much as it had started and stoking concern about its momentum in 2016.
Over all, the economy expanded at an annual rate of just 0.7 percent in the fourth quarter of 2015, the Commerce Department said Friday.
Little more than a month ago, economists thought growth was running at more than twice that pace, but data showing tepid business activity, still-sizable inventories and slightly more cautious consumer spending during the holiday season indicated that the economy was likely in the midst of another anemic patch.
It could have been worse — a few economists on Wall Street had thought the economy might have actually contracted last quarter, while others predicted no growth.
As it turned out, the slowdown was brought on by slower sales of durable goods like cars and appliances, a weaker trade picture and falling inventories. Services held up a bit better, underscoring how domestically driven sectors are faring much better than industries that depend on overseas demand.
For all of 2015, the economy grew 2.4 percent, identical to the temporecorded in 2014 but considerably better than the 1.5 percent gain for 2013.
Despite the lackluster numbers for gross domestic product, by other yardsticks the economy looks considerably healthier.
The unemployment rate now stands at 5 percent and most experts forecast that it will keep falling. Employers added an average of nearly 300,000 positions a month in October, November and December.
The real estate market, the principal investment asset for most American families, has also held up well, despite the recent sell-off on Wall Street and turmoil in overseas markets.
And last month, the Federal Reserve raised short-term interest rates for the first time in nearly a decade, a sign that policy makers believe the economy is strong enough to withstand slightly tighter monetary policy over the long term.
On Wednesday, the Fed held off on another interest rate increase after a two-day meeting but in a statement, officials indicated they would weigh another increase when policy makers next meet, in March.
“There are definitely problem areas, but consumer spending, housing and the nonenergy parts of capital spending are still fairly solid,” said Nariman Behravesh, chief economist at IHS, a research and consulting firm.
Friday’s report is the first of three estimates the Commerce Department will make for growth in gross domestic product, and as more data comes in, the figure could be revised upward or downward. The next estimate will be released on Feb. 26.
One major headwind has been shrinking inventories, which reduced growth by nearly half a percentage point last quarter.
After big increases in goods at warehouses and on store shelves lifted growth in the middle of the year, “there was probably some payback in the fourth quarter,” Mr. Behravesh said in an interview before the release of the data.
“That affects top-line growth but doesn’t really say so much about the fundamentals of the U.S. economy,” he added.
Looking ahead, Mr. Behravesh expects the economy to expand at a rate of about 2.5 percent in the first half of 2016, with the unemployment rate continuing to fall and salaries beginning to show signs of life after years of stagnation.
“I think it’s entirely possible we could see unemployment fall to 4.5 percent by the end of the year,” he said.
Still, expectations for the coming quarters have been drifting lower as weaker data for the fourth quarter of 2015 has accumulated in recent weeks.
Big business has been noticeably cautious to invest, despite healthy profits in many industries.
The strong dollar and weakness in Asia and Europe have hurt many manufacturers, commodity producers and other exporters, especially in the Midwest.
One mystery for economists has been why lower oil prices haven’t done more to stimulate growth, especially among consumers.
One explanation is that Americans are saving a substantial portion of the windfall at the gas pump or using it to pay down debt, which ultimately benefits the economy even if it represents a drag in the short term.
Another possibility is that consumers remain skeptical about how long gasoline prices will stay below $2 a gallon on average, the lowest they have been since the depths of the financial crisis in late 2008.
It’s entirely possible, of course, that we’ll see the growth figures for the fourth quarter improve as the revisions are released in February and March, but at least initially one has to admit that this is less than an ideal report under the circumstances. Ideally, economic growth should be above two percent per year, and preferably above 2.5% per year, on a consistent basis. Otherwise, the economy is essentially just treading water and could easily be pushed into another period slow growth or recession by factors beyond anyone’s control such as the weather, overseas conflict or increasing tensions, or economic shocks from a nation such as China. The fact that we’ve seen evidence of all three in just the past month, combined with this report, should at least be cause for concern going forward. As it is, over the past six years, we’ve seen only one year in which the economy has grown at a 2.5% rate and no year since 2005 during which the economy has grown at anything approaching a 3.0% rate. This means that the recovery from the Great Recession has been among the weakest we’ve seen from any economic downturn since the Second World War, and it suggests that the economy as a whole remains far more vulnerable to being tossed into a recession than many people may realize.
The Wall Street Journal’s reports highlights many of those concerns:
WASHINGTON—The U.S. economy sputtered in the final months of 2015, a sign of flagging momentum amid global weakness and financial market turmoil.
Gross domestic product, a broad measure of economic output,expanded at a 0.7% seasonally adjusted annualized rate in the fourth quarter, the Commerce Department said Friday. The economy had advanced 2% in the third quarter and 3.9% in the second quarter.
Economists surveyed by The Wall Street Journal had expected GDP to grow at a 0.8% pace in the October-to-December span.
The U.S. economy has faced an array of crosscurrents over the last year. Steady job gains, an improving housing market and banner auto sales helped underpin growth through much of the year. But rapidly falling oil prices and a strong dollar have had a mixed impact on businesses and consumers. And a slowdown in China, persistent weakness in Europe and volatile financial markets have been a drag.
The latest reading concludes another year of steady, but unspectacular, growth. For all of 2015, GDP expanded 2.4%, the same as 2014 and roughly in line with the 2.1% average since 2010, the first full year after the recession.
What is less clear is whether the fourth quarter was another dip that will be followed by a rebound—as has happened several times since the recession ended in mid-2009—or whether it signals a more persistent slowdown.
The Federal Reserve in December decided to raise interest rates for the first time in nearly a decade, citing a healthy labor market and other signs of steady economic growth. But central bank officials, following a two-day meeting this week, sounded less certain about plans for additional increases this year.
“The [Fed] is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook,” officials said in a statement.
Low rates are meant to spur investment and hiring but also risk distorting markets. By keeping rates near zero, the Fed also is left with less ammunition in the event of another recession.
Friday’s GDP numbers showed inventory stockpiles, trade and business investment were drags on the economy during the fourth quarter. Inventory figures can be volatile and a slowdown there may well ease in the early part of 2016. A decline in net exports, meanwhile, is more a reflection of a strong dollar and overseas developments than domestic demand.
A slowdown in consumer spending and a decline in business investment could be more of a concern.
Personal consumption, which accounts for more than two-thirds of economic output, rose 2.2% in the fourth quarter, down from 3% in the third quarter. Cheaper gasoline and steady job gains weren’t enough to allay a sense of caution in the final months of the year.
But even with the fourth-quarter pullback, full-year consumer spending in 2015 grew 3.1%, the fastest pace in a decade.
Nonresidential fixed investment, a measure of business spending, fell 1.8% in the fourth quarter as companies trimmed outlays on structures and equipment.
Spending in the energy industry has been especially constrainedamid low commodity prices—outlays on mining, shafts and wells tumbled 35% during all of 2015, the sharpest drop in nearly three decades.
Spending on residential investment, such as new home construction and home remodeling, advanced 8.1% in the fourth quarter. The housing market in 2015 was by some measures the strongest since before the recession.
Overall government spending expanded. Federal nondefense spending grew 1.4% and defense spending rose 3.6%. Spending at the state and local level contracted 0.6%.
If there was any good news from the report, it’s the fact that the numbers continue to show that there’s no evidence that inflation has returned at either the consumer or the wholesale level. This is especially relevant given the fact that nearly a decade of low interest rate policy from the Federal Reserve has led many old inflation hawks to raise concerns that the old enemy from the 1970s could return in the face of essentially free money from the Federal Reserve. The fact that it has not suggests that, notwithstanding some of the arguments that the Federal Reserve has used to justify its initial increase in interest rates for the first time in ten years, there are few signs of the economy being hit with an inflationary spiral any time soon and that slower growth and the risk of recession are arguably more of a concern than the negative impact of low interest rates. The Federal Reserve appears to recognize this in its, as always, cryptic and hard to decipher public statements, but at the same time it also seems clear that the institution remains committed to raising interest rates, albeit modestly, at least once every quarter going forward. If this first report after the increase in December is any indication, though, it seems as though the Fed may be miscalculating the need for immediate interest rate increases.
In addition to Federal Reserve policy, of course, reports like this have implications for the race for President as well as the other political races that will be on the ballot in November. The best case scenario for Democrats would be a solidly growing economy along the lines of what we’ve been seeing since 2010. It certainly hasn’t been a perfect or consistent recovery, and there are questions about how strong the economy actually is at the moment, but the numbers are moving in the right direction in all respects and that gives Democrats running on the President’s record something to point to as a reason to return them to office and continue the status quo. If the economy starts turning negative, or even just stagnating, though, then it will add ammunition to Republican arguments that the economic recovery has been exceedingly weak and that the nation needs to revise taxation and other policies in order to spur economic growth. A stagnant or shrinking economy is also likely to provide ammunition to those such as Donald Trump who have argued that increased legal and illegal immigration and international trade has hurt the American economy notwithstanding the fact that there is no evidence to support either of these contentions. For the political implications alone, then, it will be important to pay attention to these economic numbers going forward.