U.S. economy slowed to scant 0.7 per cent growth rate last quarter

Slowdown could renew doubts about the durability of the economic expansion

WASHINGTON — The U.S. economy’s growth slowed sharply in the final three months of 2015 to a 0.7 per cent annual rate. Consumers slowed spending, businesses cut back on investment and global problems trimmed exports.

The slowdown could renew doubts about the durability of the 6 1/2-year-old economic expansion, though most economists expect growth to rebound in the current January-March quarter.

The government’s estimate Friday of the economy’s expansion in the October-December period was less than half the modest 2 per cent annual growth rate in gross domestic product in the previous quarter. It was the weakest showing since a severe winter slowed growth to a 0.6 per cent annual rate in last year’s first quarter.

Paul Ashworth, chief U.S. economist at Capital Economics, called the disappointing fourth quarter performance a “temporary blip” and not likely “the start of a more serious downturn.”

Ashworth said he thinks GDP growth will rebound to an annual rate between 2.5 per cent and 3 per cent in the first half of this year as consumer spending picks up in response to further solid gains in job growth. For 2016 as a whole, Ashworth is forecasting economic growth of 2.5 per cent.

Much of the weakness last quarter reflected a slowdown in consumer spending, which grew at an annual rate of 2.2 per cent, compared with a 3 per cent rate in the previous quarter. Spending on both durable goods, such as cars, and nondurable goods, such as clothing, slowed.

Consumer spending accounts for about two-thirds of economic activity, and most analysts are counting on continued strong employment growth to fuel a rebound. Some, however, worry that China’s economic troubles and sinking oil and stock prices could continue to dampen the U.S. expansion.

Friday’s estimate of fourth-quarter growth was the first of three the government will issue.

Besides consumer spending, another source of weakness last quarter was a drop in exports. It reflected in part a stronger dollar, which has made U.S. goods pricier and therefore less competitive overseas. Persistent weakness in such key export markets as China and Europe hurt, too. A wider U.S. trade deficit cut annual growth last quarter by 0.5 percentage point.

Another drag came from cutbacks in business investment spending, which fell at a 1.8 per cent annual rate, with spending on structures down 5 per cent. That reflected a 38 per cent plunge in spending in the oil and gas industry, which has slashed drilling and exploration in response to the plunge in oil prices.

In addition to their investment pullback, businesses cut spending on stockpiles to try to pare unwanted inventories. That effort reduced growth by 0.5 percentage point in the fourth quarter.

Home construction grew at a solid 8.1 per cent annual rate. Government spending slowed to a growth rate of just 0.7 per cent. Spending by the federal government grew at a 2.7 per cent annual rate, while state and local governments cut back on spending at a rate of 0.6 per cent.

For all of 2015, the economy grew 2.4 per cent, matching the growth in 2014. Both years improved on a 1.5 per cent increase in 2013. Still, last year’s growth rate extended the economy’s pattern of subpar expansion since the Great Recession officially ended in June 2009.

For 2016, economists have forecast another year of modest growth of around 2 per cent. At the same time, they have nudged up the likelihood of a recession. While still low, the likelihood is now put at around 20 per cent, though most analysts still see an outright recession as unlikely.

This week, the Federal Reserve issued a cautious assessment of the economy. The Fed left interest rates unchanged after having raised its benchmark short-term rate in December from record lows. Many analysts think that economic weakness, subpar inflation and global pressures will cause the Fed to slow its pace of rate hikes this year from what had been expected to be four increases to perhaps only two.

Economists expect strength in the domestic economy this year to offset weakness in export sales and in the energy sector.

Though economic growth as a whole was lacklustre last year, hiring was not. The economy added an average of 284,000 jobs a month in the final quarter of last year. The unemployment rate ended the year at a low 5 per cent.

Mark Zandi, chief economist at Moody’s Analytics, has said he expects strong job growth to keep lowering unemployment and to help boost wages, which have lagged in this recovery. He said the extra consumer spending, which will be aided by lower gas prices, will likely support economic growth of around 2.5 per cent in 2015.

Growth at that level is above the economy’s potential right now, which many analysts put at around 2 per cent, reflecting in part a slower rate of people entering the job market and slower productivity growth.

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