WRAPUP 5-Households, trade keep U.S. economy humming in fourth quarter

Thu Jan 30, 2014 12:39pm EST

Related Topics

* Fourth-quarter GDP grows at 3.2 percent annual rate
    * Consumer spending fastest in three years
    * Trade also a boost, inventories lend a hand
    * Economy on strong growth path this year

    By Lucia Mutikani
    WASHINGTON, Jan 30 (Reuters) - Strong household spending and
robust exports kept the U.S. economy on solid ground in the
fourth quarter, but stagnant wages could chip away some of the
momentum in early 2014.
    Gross domestic product grew at a 3.2 percent annual rate in
the final three months of last year, the Commerce Department
said on Thursday, in line with economists' expectations. 
    While that was a slowdown from the third-quarter's brisk 4.1
percent pace, it was a far stronger performance than had been
anticipated earlier in the quarter and welcome news in light of
some drag from October's partial government shutdown.
    "The economy was firing on almost all cylinders as 2013 came
to a close. For today, the sun is out and shining," said Chris
Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi
UFJ in New York.
    Early in the quarter many economists were expecting a growth
pace below 2 percent given that an inventory surge accounted for
much of the increase in the July-September period.
    Taking both quarters together, growth came in at a 3.7
percent pace, up sharply from 1.8 percent in the first six
months of the year. It was the biggest half-year gain since the
second half of 2003.
    Stocks on Wall Street pushed higher on the back of the
report, rebounding from the previous session's decline. U.S.
Treasury debt prices fell, while the dollar rose against a
basket of currencies.  
    Consumer spending was the main driver of fourth-quarter
growth, but there was also a strong boost from trade. Business 
investment also lent support as did the restocking of
warehouses, but not at the same scale as in the third quarter.
    The report was released a day after the Federal Reserve
announced another reduction to its monthly bond purchases and
shrugged off a surprisingly sharp slowdown in job growth in
December.
    "If this keeps up, the Fed will have to consider speeding up
its too-slow exit strategy," said Rupkey.
    Consumer spending rose at a 3.3 percent rate, the strongest
since the fourth quarter of 2010. Consumer spending, which
accounts for more than two-thirds of U.S. economic activity,
advanced at a 2 percent pace in the third quarter.
    Some economists said solid consumer spending likely
encouraged businesses to continue accumulating stocks.
    Inventories increased $127.2 billion, the most since the
first quarter of 1998. That added 0.42 percentage point to GDP
growth. Inventories had risen $115.7 billion in the third
quarter, contributing 1.67 percentage points to output.
    "We have not seen this level of back-to-back strength in
some time. I would say this is the strongest signal that
consumption will continue to grow in coming quarters," said Tim
Hopper, chief economist at TIAA-CREF in New York.  
    Excluding inventories, the economy grew at a 2.8 percent
rate, up from the third-quarter's 2.5 percent rate.
    
  
    
    STRONG DEMAND
    The sturdy increase in demand should put the economy on a
stronger growth path this year. However, anemic wage growth
could take some edge off consumer spending early in the year. 
    In addition, some economists view the current level of
inventories as unsustainable and expect a correction beginning
in the first quarter. In addition, business investment could
cool off after a surprise tumble in orders for capital goods
excluding defense and aircraft in December. 
    The strong performance from trade is also unlikely to be
repeated as slowing growth in China is expected to curb exports,
while firming domestic demand will suck in imports. 
    Even so, a lessening of the fiscal austerity that gripped
Washington last year should keep the economy on a firmer growth
path this year. Economists expect growth this year of 2.9
percent, up from last year's 1.9 percent.
    "We do not expect another large contribution from trade,
inventories have reached levels that are unlikely to be
maintained, and private domestic demand shows slightly less
momentum," said Peter D'Antonio, an economist at Citigroup in
New York.
    "Nevertheless, we anticipate that the underlying path of
growth will continue to strengthen toward the 3 percent range
for all of 2014." 
    Slack in the labor market has restrained wage growth. In a
separate report, the Labor Department said new applications for
state unemployment benefits rose 19,000 last week to 348,000. 
    Consumption in the fourth quarter came at the expense of
saving. The saving rate slowed to 4.3 percent in the fourth
quarter from 4.9 percent in the prior period. 
    Income at the disposal of households after accounting for
inflation rose at a tepid 0.8 percent rate. That was a sharp
slowdown from the 3.0 percent pace in the third quarter.
    "Income growth remains the biggest constraint to growth. We
will not achieve sustainable strong growth unless wage growth
picks up," said Joel Naroff, chief economist at Naroff Economic
Advisors in Holland, Pennsylvania. 
    Sluggish wages kept inflation pressures benign. A price
index in the GDP report rose at a 0.7 percent rate, decelerating
from the third-quarter's 1.9 percent pace. A core measure that
strips out food and energy costs increased at a 1.1 percent rate
after advancing at a 1.4 percent pace in the July-September
period.
    Exports rose at their fastest pace in three years. That
combined with declining petroleum imports to narrow the trade
deficit. Trade contributed 1.33 percentage points to GDP growth.
    Business spending on equipment accelerated at a 6.9 percent
rate in the fourth quarter after rising at only a 0.2 percent
pace in the prior three months. But here was a decline in
business spending on nonresidential structures.
    A run-up in mortgage rates, which held back home sales and
renovations, saw residential investment falling for the first
time since the third quarter of 2010. Home sales have been on
the back foot in recent months and that trend is likely to
persist for a while as the market adjusts to higher loan rates.
    A third report showed contracts to buy previously owned
homes tumbled 8.7 percent in December to a two-year low.
    Government spending contracted at a 4.9 percent pace,
reflecting the 16-day partial shutdown of the federal government
in October and a plunge in defense spending. The Commerce
Department said the shutdown sliced 0.3 percentage point off of
GDP growth through reduced hours worked by federal employees.
FILED UNDER: