Solid U.S. Growth but Weakness Still Present

Guest Post by Director Greg Kyle

In the first reading of the U.S. economy’s performance for the last quarter of 2014, the Commerce Department released its “advance” estimate, showing that GDP increased at a 2.6% annual rate. This was below the WSJ consensus estimates of 3.2% and down from the strong 5% growth in the third quarter. For the year, the U.S. economy expanded at a 2.4% pace. Driving the economic growth in the fourth quarter was strong consumer spending, which increased 4.3%, the strongest quarterly increase in consumer spending in eight years. Helping to boost consumer spending during the quarter was an improved job market, lower gasoline prices and higher consumer confidence.

The solid increase in consumer spending helped offset weakness in the business sector, where business spending advanced at a weak 1.9% annual rate. Spending on equipment declined nearly 2% during the last quarter of the year.

Government spending was also weak during the quarter, with federal government spending and investments declining 7.5%. National defense spending was down 12.5%, while non-defense spending increased at a 1.7% rate. With slowing economies in Asia and Europe, U.S. export growth was also weak, increasing just 2.8% in the quarter, down from a 4.5% increase in the third quarter.

Separately on Wednesday, the Federal Reserve released a statement indicating that “economic activity has been expanding at a solid pace.” The Fed found that since its FOMC meeting in December, the jobs situation has continued to improve with “strong job gains and a lower unemployment rate.” This has helped boost household spending and could lead to solid economic growth in the first quarter of this year. As consumer spending accounts for roughly 70% of GDP, solid household spending can help to offset any continued weakness in government spending and export demand.

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