GDP Growth in the Fourth Quarter – Out Like a Lamb


The Bureau of Economic Analysis (BEA) released the advance estimate of real GDP growth in the fourth quarter of 2015, reporting a seasonally adjusted annual rate of 0.7%. GDP grew at an annual pace of 3.9% and 2.0% in the second and third quarters, respectively. The BEA emphasizes that the advance estimate is based on incomplete data and will be revised, but the slowdown in growth in the second half of the year is clear.

As expected, declines in the energy sector and inventory investment subtracted from growth, and a strong US dollar relative to other currencies pushed exports down, depressing growth further. The unexpected drag on growth came from a slowdown in personal consumption expenditures (PCE).

Downward pressure from inventories has done its worst in the current and last quarter and will lessen going forward. The energy sector will find a bottom when the price of oil does which should be in the near term but remains highly uncertain. That’s the good news.

The strong dollar and a slowing global economy have the potential to be more lingering problems. Strength in recent quarters has come from consumers and fixed investment outside the energy sector, including residential fixed investment (i.e., homebuilding). Strength going forward will depend on consistent contributions from these sectors, making the slowdown in PCE growth in this quarter particularly troubling.

Continuing gains in the labor market and strength in personal income growth over the past year should reignite consumer demand, but the weak finish to 2015 in economic growth is a disappointing contrast to the strong finish in the labor market (jobs).

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