The Bureau of Economic Analysis (BEA) released their first estimate of fourth quarter economic growth for the United States. U.S. economic growth, as measured by Gross Domestic Product (GDP) is estimated to have grown at 2.6%. As a reminder, this is the first estimate and is subject to two revisions over the next two months.
For all of 2014, GDP is estimated to have grown at 2.4% compared to 2.2% in 2013. This is consistent with the growth rates seen since the recovery began. GDP has averaged 2.1% since 2010. The annual growth pattern has been as follows:
|Analyzing the data shows that the major contributor to fourth quarter GDP was consumer spending. In essence, consumer spending accounted for all of the economic growth since negative contributions from government spending and net exports offset positive increases in gross private investment. Here is the breakdown of how each sector of the economy contributed to the 2.6% fourth quarter growth:
Looking at the consumer, what we saw was that durable goods made up 45% of their purchases of goods. Vehicles (cars, trucks and recreational vehicles) were the bulk of the purchases for durable goods. Non durable goods made up 55% of their goods purchases with clothing and footwear being the biggest contributor-this is probably a function of the holiday season. Consumers actually reduced their level of spending for food and beverages. Overall, goods made up 42% of consumer spending.
Services were the biggest category of consumer spending, making up 58% of their spending. Healthcare spending made up 31% of their spending on services. Housing and utilities made up 19% of their spending on services.
Looking at gross private investments, change in inventories accounted for 68% of gross private investments. As I have cautioned in the past, changes in inventories is a volatile component and not a reliable source of growth. The next biggest component of gross private investments was growth in intellectual property products. This made up 23% of total gross private investments. Residential construction was 11% of gross private investments while commercial construction made up 7%. Investments in plant and equipment subtracted 9%. This could well be the beginning signs of the cut backs occurring in the energy complex.
The negative contribution of net exports was due to a slowing in exports and increasing imports. This provides some evidence that the strengthening dollar has made U.S. goods more expensive and harder to sell overseas, while foreign goods are now cheaper resulting in increased imports.
The negative contribution from government spending was all at the federal level. Federal government spending contributed (.54%) while state & local government spending contributed +.14%.
Overall, a 2.6% growth rate was below economists projections of 3% but still a solid and respectable number. This number is not strong enough to cause the Federal Reserve to raise rates sooner than what they have been indicating but it is also not weak enough to cause them to delay raising interest rates.
Steve Scranton is the Chief Investment Officer and Economist for Washington Trust Bank and is a CFA charter holder with over 30 years of investment experience with equities, tax-exempt and taxable fixed income securities. Steve actively participates on committees within the bank to help design strategies and policies related to client and bank owned investments. Steve also serves as the economist for the Bank and has been a featured speaker for both client and professional organization events throughout the Northwest.