U.S. Economy Grew 1.4% in Fourth Quarter, Supported by Consumers

The U.S. economy expanded in the fourth quarter at a faster pace than previously estimated, supported by stronger household spending on services.

The revised 1.4 percent increase in gross domestic product, the value of all goods and services produced, compares with the Commerce Department’s previous estimate of 1 percent, according to figures issued Friday. The economy grew 2 percent in the third quarter. The report also showed that corporate profits dropped in 2015 by the most in seven years.

The earnings slump illustrates the limits of an economy struggling to gather steam at the start of this year. Some companies, encumbered by low commodities prices and sluggish foreign markets, are cutting back on investment while a firm labor market and low inflation encourage households to keep shopping.

“The pace of growth slowed as we ended 2015, though consumer spending is still the primary underpinning of this economic expansion,” Sam Bullard, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said before the report. “Any pickup we might see is still likely going to be capped given the overall global picture.”

The median forecast of 73 economists surveyed by Bloomberg called for fourth-quarter growth of 1 percent, with projections ranging from no change to a 1.4 percent gain. This is the last of three estimates for the quarter before annual revisions in July.

The figure marks a slowdown from the 2.2 percent average pace in the first three quarters of 2015. For all of last year, the U.S. economy grew 2.4 percent, matching the advance in 2014.

Today’s fourth-quarter growth figure reflected more spending on services, particularly on recreation and transportation. Exports also declined less than previously estimated.

Consumer Spending

Household purchases, which account for almost 70 percent of the economy, rose at a 2.4 percent annual pace, compared with a previously estimated 2 percent rate. Personal consumption added

1.66 percentage points to growth.

Weak overseas demand has weighed on net exports, with trade subtracting 0.14 percentage point from overall growth after a previously reported 0.25 percentage point. The gap in goods and services trade may stay wide as the U.S. economy plods ahead and foreign markets, including China, struggle to improve.

Inventories subtracted 0.22 percentage point from growth compared with a previous estimate of a 0.14 percentage-point drag. American companies are still trying to get stockpiles more in line with demand.

Final Sales

Stripping out inventories and trade, the two most volatile components of GDP, so-called final sales to domestic purchasers increased at a 1.7 percent rate, compared with a previously estimated 1.4 percent pace.

Friday’s report also offered a first look at corporate profits for the period. Pre-tax earnings declined 7.8 percent, the most since the first quarter of 2011, after a 1.6 percent decrease in the previous three months. The estimate of nonfinancial corporate profits was reduced by a $20.8 billion Settlement Settlement Settlement in finance refers to the process when a buyer makes payment and receives the agreed-upon services or goods. The term is used on exchanges such as New York Stock Exchange (NYSE) when security changes hands. When the asset is transferred and placed in the new buyer's name, it is considered settled. This process could take a few hours or several days after a trade is made. It depends on the clearance process. In the United States, the settlement date for marketable stocks is usually 2 Settlement in finance refers to the process when a buyer makes payment and receives the agreed-upon services or goods. The term is used on exchanges such as New York Stock Exchange (NYSE) when security changes hands. When the asset is transferred and placed in the new buyer's name, it is considered settled. This process could take a few hours or several days after a trade is made. It depends on the clearance process. In the United States, the settlement date for marketable stocks is usually 2 Read this Term, considered a transfer to the government, between BP and the U.S. after the 2010 oil spill in the Gulf of Mexico.

Profits in the U.S. dropped 3.1 percent in 2015, the most since 2008. Corporate earnings are being weighed down by weak productivity, rising labor costs and the plunge in energy prices. Economists at JPMorgan had expected a 9.5 percent drop in pre-tax earnings in the fourth quarter.

Although profits that have declined as much in the past have signaled a recession within three years about 90 percent of the time, the bank says a big reason for the setback now is because energy companies have been hurt by plunging oil prices.

Capital Spending

“If profits remain depressed, the prospects for capex and hiring will come under greater pressure,” Wells Fargo’s Bullard said in a research note.

Corporate outlays for equipment declined at a 2.1 percent annualized pace, subtracting 0.12 percentage point, the Commerce Department said.

A strengthening labor market is supporting steady U.S. household demand even as factories continue to struggle amid the global slowdown. Employers added 242,000 workers to payrolls in February and the unemployment rate held at an eight-year low of

4.9 percent. Firings linger near four-decade lows.

Consumers have also been buoyed by gasoline prices. The cost of an average gallon of regular gasoline was $2.01 as of March 23, compared with $2.40 on average for all of 2015, according to motoring group AAA.

To contact the reporter on this story: Michelle Jamrisko in Washington at mjamrisko@bloomberg.net.

To contact the editor responsible for this story: Carlos Torres at ctorres2@bloomberg.net, Vince Golle

By: Michelle Jamrisko

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