U.S. Economic Expansion Moderates, Consumers Splurge

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The growth rate of the  United States economy fell by almost half in the fourth quarter as sliding government expenditures,  ebbing business investment and rising imports subtracted from the largest jump in consumer spending in more than eight years and substantial build in inventories.

Gross domestic product t, the widest measure of economic activity, fell to 2.6 percent annualized in the final three months of last year, from 5 percent in the previous quarters according to Commerce data today. Analysts in the Reuters survey had predicted 3 percent growth.

Consumer spending surged 4.3 percent, it best performance since the first quarter of 2006, up from 3.2 percent in the third quarter. Consumption accounts for about 70 percent of the U.S. economy.  A 4 percent improvement had been expected.

The U.S. economy expanded 2.4 percent in 2014, 2.2 percent in 2013 and 2.3 percent in 2012.

. Business capital investment rose at a 2.3 percent rate, less than a third of the 7.7 percent expansion in the third quarter. Government outlays dropped 2.2 percent, taking 0.4 percent form growth.  The trade deficit increased to $471.5 billion, with imports jumping more than three times as fast as exports and reducing GDP by 1 percent.

The gain in consumer spending added 2.9 percent to GDP and was led by more than $200 billion in healthcare costs.  Inventories also boosted GDP performance as $113.1 billion in additional stockpiles, more than a third higher than in the third quarter and the second highest quarterly increase since 2000 adding 0.8 percent to economic growth.

However, inventory creation is a double edged sword, what was added to GDP in the fourth quarter will likely be subtracted in the first quarter of 2015 as manufactures cut back on production until the amassed goods are sold.

Crude oil prices have fallen almost 60 percent since the summer and this has allowed consumer to shift purchases from fuel and gasoline to discretionary consumption. The nationwide average price of a gallon of regular gasoline fell 33 percent in the quarter, from $3.33 on the first day to $2.24 by the last day of the year.

This addition to household discretionary income combined with the best job creation in fifteen years has contributed to a burst of consumer confidence. The University of Michigan consumer sentiment index for January came in at 98.1, the highest in twelve years. Reading for ‘current conditions’ 109.3 and ‘expectations’ 91.0 were also the highest in more than a decade.

The Federal Reserve policy statement on Wednesday said the U.S. “economic activity has been expanding at a sold pace”, an improved description form the previous FOMC statement which has characterization the expansion as “moderate”.

The central bank is debating whether the U.S. economy is strong enough to increase the Fed Funds rate, which has been at 0.25 percent since December 2008, for the first time in eight years.

Yesterday, Fed Chair Janet Yellen seemed to indicate that although the U.S. economy has improved international developments might keep the Fed from rising rates mid-year as currently expected. But today, James Bullard, President of the St. Louis Fed suggested that the “market would be wrong not to expect a mid-year rate rise.” He has previously said that low inflation alone cannot justify zero rates.

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg10 yr jan 30 cvonsumer jan 30 gas jan 30 gdp jan 30

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