US GDP Revised Higher

The U.S. economy unexpectedly expanded at a faster pace in the fourth quarter than initially estimated, reflecting a higher value of business inventories.

Gross domestic product, the value of all goods and services produced, grew at a 1 percent annualized rate, compared with an initial estimate of 0.7 percent, Commerce Department figures showed Friday in Washington. The median forecast in a Bloomberg survey called for a 0.4 percent gain. Consumer spending was revised lower.

Although the economy slowed in the fourth quarter from 2 percent in the previous three months, growth is projected to re-accelerate this year as consumers tap into the benefits of a strengthening job market and savings on gasoline to boost spending. An improving outlook in the U.S. and abroad will be needed to give companies the incentive to increase investment after cutting back at the end of 2015.

The lackluster pace of fourth-quarter growth “overstates the slowdown that we’re seeing,” Sarah House, an economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said before the report. Looking ahead, “the consumer is still going to be the strongest part of the economy, but we may see spending moderate this year.”

Economists’ estimates in the Bloomberg survey ranged from annualized growth rates of 0.1 percent to 0.9 percent. The GDP estimate is the second of three for the quarter, with the other release scheduled for next month when more information can be incorporated. The revision shows GDP expanded 2.4 percent in 2015.

The changes to fourth-quarter growth largely reflected how unsold goods are valued. In inflation-adjusted terms, there was more inventory accumulation that previously estimated as underlying price data were revised up.

Business Inventories

Inventories grew at an $81.7 billion annualized rate from October through December and reduced growth by 0.14 percentage point, compared with a previously reported 0.45 percentage-point drag.

The trade gap also weighed less on growth than earlier estimated. The difference between exports and imports shaved
0.25 percentage point from growth, primarily due to fewer goods shipments from overseas. It was previously estimated to have subtracted 0.47 percentage point.

Stripping out inventories and trade, the two most volatile components of GDP, so-called final sales to domestic purchasers increased at a 1.4 percent rate, compared with a previously reported 1.6 percent pace.

Consumer Spending

Household consumption, which accounts for almost 70 percent of the economy, grew at a 2 percent annualized rate, weaker than the 2.2 percent pace initially estimated.

The report also included revisions to third-quarter personal income, which held less encouraging news for consumers. Wages and salaries rose by $78.2 billion from the previous three months, revised down from an initially reported $103.9 billion gain. They increased by an additional $83.3 billion in the fourth quarter.

Non-residential fixed investment decreased at a 1.9 percent annualized rate, little changed from a previously estimated 1.8 percent decline.

A separate report this week indicated that the investment slowdown may be easing. Orders for capital equipment, a harbinger of business spending on such things as machinery and computers, jumped in January after plunging to a more than two-year low at the end of 2015, figures from the Commerce Department showed Thursday in Washington.

The report corroborated recent, more upbeat, manufacturing production and employment figures that had been called into question as surveys showed confidence among factory managers was sinking.

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell