Tuesday, July 17, 2018
Business

Household spending and home building fuel modest U.S. growth

WASHINGTON — Consumer spending and home construction are helping sustain modest U.S. economic growth despite problems caused by a strong dollar, low oil prices and an excess of business stockpiles.

The economy, as measured by the gross domestic product, grew at a 1.4 percent annual rate in the October-December period, the government said Friday. That was better than the 1 percent growth rate the government had estimated a month ago.

Much of the new-found strength came from consumer spending on services such as recreation, which helped offset a manufacturing slump caused in part by a global economic slowdown.

"The consumer and housing are driving the economy despite some nasty headwinds," said Nariman Behravesh, chief economist at IHS Global Insight. "Manufacturing for all intents and purposes is in a recession, whereas the service sectors are doing fairly well and housing has been a bright spot."

Nearly two-thirds of the upward revision in GDP came from the boost in consumer spending, which accounts for about 70 percent of economic activity. Analysts were encouraged by the revised fourth-quarter estimate, saying it provided momentum for the rest of the year, when they expect growth to reach a stronger if still-modest 2 percent annual rate.

"Real economic growth was stronger than we thought late last year, and this makes us more hopeful that the first quarter will be better than expected," said Chris Rupkey, chief economist at MUFG Union Bank in New York.

Economists say that steady job growth will support further gains in spending and help ease the pressures from overseas. The rise in the dollar's value has contributed to a higher trade deficit by making U.S. exports more expensive overseas and imports less expensive for Americans.

Another source of weakness has come from the drop in oil prices, which has triggered layoffs at energy companies and sharp reductions in investment spending on drilling and exploration.

Friday's report showed that residential investment grew at an annual rate of 10.1 percent in the October-December quarter. That surge helped offset a 2.1 percent drop in nonresidential investment resulting in part from the cutbacks at energy companies.

Trade subtracted 0.14 percentage point from growth in the fourth quarter. This was slightly less than previously thought because the weakness in exports was less than previously estimated. A slowdown in inventory building cut 0.2 percentage point from growth. Economists say this drag has continued into the current quarter.

The estimated growth of GDP — the nation's total output of goods and services — was the government's third and final look at economic expansion for the October-December quarter.

The areas of weakness contributed to a 7.8 percent plunge in corporate profits in the fourth quarter after a 1.6 percent drop in the third quarter. Fourth quarter profits were down 11.5 percent from a year earlier — the steepest annual drop since 30.8 percent plunge in the fourth quarter of 2008 at the depths of the financial crisis.

Though profit declines of that magnitude can raise concerns about a possible recession, Behravesh said they were heavily influenced by the weakness in the energy sector. Nearly 80 percent of the $159.6 billion profit decline in the fourth quarter came from a plunge in profits in the petroleum and coal sectors.

"The profit decline was way overstated by the weakness in energy," Behravesh said. "We are not in a recession, and we are not headed for one. We think a recession this year or even next year is a low probability of only 20 percent."

Behravesh said he foresees annualized GDP growth in the current January-March quarter of around 1.5 percent, with gradual strengthening as the weakness from low energy prices and paring of stockpile levels wane. He predicted that growth in the second and third quarters would be around 2.5 percent and then rise to around 3 percent by the final three months of this year.

This month, the Federal Reserve left its key policy rate unchanged after having raised it from a record low in December. Fed officials also scaled back their expectations for the number of rate hikes this year from four to two.

The officials said they thought the global economy and financial markets still pose risks even though financial markets have stabilized since the year began. Stocks had nosedived after investors worried about how steep the slowdown would be in China, the world's second-largest economy.

Analysts have forecast that for 2016 as a whole, the economy will grow around 2 percent. That would be down from 2.4 percent growth for all of 2015, a figure that was not revised in Friday's report.

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