NEW YORK — The advance estimate of fourth-quarter American gross domestic product (GDP) showed a 2.6 percent annualized increase, thereby falling short of market expectations for a 3.0 percent gain in the quarter, RBC Economics reported.
While still at an above-trend pace of growth, the fourth-quarter increase represented a slowing relative to gains of 4.6 percent and 5.0 percent in the second and third quarters, respectively, said Josh Nye, an RBC economist. These gains, which followed a weather-related 2.1 percent decline in first quarter, left 2014 growth at 2.4 percent, which is the strongest annual increase since 2010 and up from 2.2 percent in 2013, said Nye.
Consumer spending growth picked up to 4.3 percent in the fourth quarter from 3.2 percent in the third quarter, thereby marking the strongest quarterly increase since the first quarter of 2006 and exceeding market expectations for a 4.0 percent gain, he explained.
Consumption growth was widespread with solid increases in durables (7.5 percent), non-durables (4.4 percent), and services (3.7 percent). Government spending fell by 2.2 percent to retrace half (on a percentage basis) of the unexpected 4.4 percent increase seen in the third quarter and thus provided a 0.4 percentage point drag on overall growth. Fixed-investment growth slowed to 2.3 percent from 7.7 percent in the third quarter and 9.5 percent in the second quarter.
This reflected a modest 1.9 percent gain in non-residential investment, because equipment and software investment fell by 1.9 percent and growth in non-residential structures moderated to 2.6 percent, said Nye.
Residential investment strengthened modestly with a 4.1 percent gain in the fourth quarter following a 3.3 percent increase in the third quarter. Factoring in all of the above, final domestic demand growth slowed to 2.8 percent in the fourth quarter, which had marked a four-year high, from 4.1 percent in the third quarter. Net exports provided a 1.0 percentage point drag on fourth-quarter growth following a 0.8 percentage point contribution in the third quarter.
The negative contribution in the fourth quarter was due to an 8.9 percent increase in imports, which was only partially offset by a 2.8 percent increase in exports. A stronger build in inventories resulted in a 0.8 percentage point contribution to growth in the fourth quarter.
The key price measure in the report, the core personal consumption expenditure (PCE) deflator, rose at a 1.1 percent annualized pace in the fourth quarter following a 1.4 percent increase in the third quarter. As a result, the year-over-year change in the core PCE deflator edged downward to 1.4 percent from 1.5 percent in the previous quarter.
“The U.S. economy rebounded strongly from a weather-related slowdown in the first quarter of 2014 with above-trend activity from the second quarter onward pushing 2014 GDP growth upward to 2.4 percent, which is the fastest annual pace since 2010,” said Nye. “Growth in the fourth quarter once again reflected solid domestic demand, with consumer spending marking the strongest quarterly gain in almost nine years.
“We expect that consumers will continue to support growth in 2015 as significant improvement in the labor market boosts aggregate incomes and lower gasoline prices leave more money for households to spend on other goods and services,” he added. “Our forecast for annual growth of 3.5 percent in 2015 also assumes a stronger contribution from residential investment, as the housing recovery gathers steam, and stronger business investment, in response to growing demand.
“We expect above-trend growth and further improvement in the labor market will support core inflation at or above its current level, thereby leaving the Fed comfortable with slowly withdrawing monetary policy stimulus this year,” Nye explained.
Canadian GDP fell 0.2 percent in November
Canadian November GDP fell by 0.2 percent following solid increases in both September and October. Market expectations had been for an unchanged reading, said Dawn Desjardins, assistant chief economist.
Large declines in manufacturing (-1.9 percent) and mining, oil and gas extraction (-1.5 percent) pushed output in the goods-producing sectors of the economy down by 0.8 percent in November. This followed gains of 0.5 percent in October and 0.9 percent in September. The service-producing sectors recorded unchanged output in the month, with seven of the 15 industries posting declines.
The largest percentage declines were in wholesale trade, accommodation and food services, and transportation and warehousing. Increased output from retail, management services, and arts and entertainment served to offset the decreases. Finance and insurance posted a 0.4 percent dip following five months of gains. Real GDP output was 1.9 percent higher than in November 2013.
“The disappointing decrease in November GDP followed a strong gain in October,” said Desjardins. “However, even assuming a recovery in December, today’s report points to the economy having geared down in the fourth quarter following the 2.8 percent rise recorded in the third quarter and 3.6 percent gain in the second quarter. Even with this slowing in the final quarter, the economy still likely grew at an above-trend pace in 2014.
“The Bank of Canada cut interest rates earlier this month as a measure of insurance against the downside risks to growth coming from the sharp drop in oil prices,” she added. “The rate cut and persistently low oil prices weighed on the Canadian dollar, which stands at its weakest level against the US dollar since March 2009.
“The weaker currency and strong momentum in the United States augur well for Canadian exports to strengthen in 2015,” she explained. “However, the bank is unlikely to consider changing its risk assessment until oil prices have reversed course and data have confirmed that the economy has continued to grow despite a pullback in energy-related investment.”
SOURCE: RBC Economics press release