Economy Slows in the 4th Quarter

The economy grew more slowly than expected at the end of 2014, according to preliminary data released Friday by the Commerce Department. This first look at GDP growth in the 4th Quarter estimated the economy expanded by 2.6% in the final three months of the year.

Friday’s estimate was far short of economists’ expectations, who had estimated the economy would grow by 3%. GDP growth in the 4th Quarter was half the level of growth achieved in the 3rd Quarter, when the economy grew by 5%.

In a familiar pattern from the last several years, year-end GDP growth was primarily driven by an increase in personal consumption. Consumer spending grew 4.3% in the quarter, beating expectations of 4.0% growth. The spending blip was driven by reduced savings and a year-end uptick in disposable income, likely because of a plunge in gasoline prices. The increased wage growth is likely a factor of realizing income before the end of the tax year.

The biggest factors in reducing economic growth were a decline in exports and a decrease in non-residential fixed investment. This represents investments in business and equipment. Businesses also built up inventories of products. Real final sales of products increased an anemic 1.8% for the quarter.

For the past several years, the economy has been locked in a sputtering cycle, unable to break out in sustained growth. The economy has small bursts of optimism that dissipates within a few months. In at least one quarter a year, consumer spending will beat expectations before falling back later in the year. Businesses have struggled to match inventories and investments to these schizophrenic signals.

The economy seems stuck in a lower gear, revving up occasionally, but unable to shift into a smooth drive. The Fed and other central banks can apply the gas to the engine, but much of the acceleration is wasted.
