Overall economic growth ended 2014 on a decent note with real GDP rising at a 2.6 percent annualized pace. Component contributions were mixed, but there is forward positive momentum heading into 2015.
Underpinning growth this past quarter, as it has over the past few quarters, was a 4.3 percent surge in consumer spending. Consumers have had several substantial tailwinds at their back in recent months, which was reflected in the broad-based nature of spending gains. Durable goods spending increased 7.4 percent, in part on healthy motor vehicle purchases, while nondurable goods rose 4.4 percent on increased clothing and gasoline purchases. Services spending accelerated this past quarter, rising 3.7 percent, as health care remained solid and utility spending rebounded. Lower energy prices have increased household purchasing power, a development we expect to continue and, therefore, support solid consumer spending growth in the coming quarters.
As expected, growth in nonresidential fixed investment slowed substantially, to a 2.3 percent pace from 7.7 percent in Q3, as lower oil prices and a stronger dollar looked to be a substantial drag on business equipment investment (-1.9 percent). Elsewhere, structures spending increased 2.6 percent while residential construction picked up 4.1 percent. While inventory’s contribution of 0.8 percentage points was much stronger than we had anticipated, net exports subtraction of 1.0 percentage point from headline growth was an even greater surprise. Incoming data had suggested a smaller drag which may, in subsequent revisions, provide upside risk to the BEA’s assumption that the trade deficit had widened by $5 billion.
Consumer Spending Still Driving Overall Gains
Following back-to-back strong growth readings in the second and third quarters, U.S. real GDP growth increased at a slower, but still healthy, 2.6 percent annualized rate in the fourth quarter. For 2014, real GDP increased 2.4 percent, up from 2013’s 2.2 percent pace, marking the strongest annual rate in four years.Underpinning growth this past quarter, as it has over the past few quarters, was a 4.3 percent surge in consumer spending. Consumers have had several substantial tailwinds at their back in recent months, which was reflected in the broad-based nature of spending gains. Durable goods spending increased 7.4 percent, in part on healthy motor vehicle purchases, while nondurable goods rose 4.4 percent on increased clothing and gasoline purchases. Services spending accelerated this past quarter, rising 3.7 percent, as health care remained solid and utility spending rebounded. Lower energy prices have increased household purchasing power, a development we expect to continue and, therefore, support solid consumer spending growth in the coming quarters.
As expected, growth in nonresidential fixed investment slowed substantially, to a 2.3 percent pace from 7.7 percent in Q3, as lower oil prices and a stronger dollar looked to be a substantial drag on business equipment investment (-1.9 percent). Elsewhere, structures spending increased 2.6 percent while residential construction picked up 4.1 percent. While inventory’s contribution of 0.8 percentage points was much stronger than we had anticipated, net exports subtraction of 1.0 percentage point from headline growth was an even greater surprise. Incoming data had suggested a smaller drag which may, in subsequent revisions, provide upside risk to the BEA’s assumption that the trade deficit had widened by $5 billion.
Moderate Forward Momentum Heading into 2015
Despite the many challenges the economy faces at present, we expect U.S. GDP to increase at around a 3 percent pace in 2015, substantially higher than the 2.3 percent recovery average we have seen to date. The fundamentals of continued healthy hiring, faster household formation and firming business capital expenditures should result in a solid pace of domestic final demand growth this year. We believe the strength of domestic demand will more than offset the headwinds from abroad, including a slower pace of export growth as a result of the strengthening U.S. dollar. Sharply lower oil prices do present downside risk to business investment, but accruing benefits to the consumer in the form of lower gasoline prices should increasingly offset the near-term drag. While we acknowledge the possibility of near-term weakness, we still believe the U.S. economic expansion will become more self-sustaining as the year unfolds.
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