Real GDP grew 2.2 percent in the fourth quarter, according to the Bureau of Economic Analysis. This was down from the previous estimate of 2.6 percent growth. Slower growth in inventory replenishment and stronger import growth accounted for the bulk of the revision. For the year as a whole, real GDP rose 2.4 percent in 2014, only slightly better than the 2.3 percent and 2.2 percent rates seen in 2012 and 2013, respectively. Still, this was largely the result of a decline in activity in the first quarter due to weather and other factors, with real GDP growth averaging a quite-healthy 4.8 percent pace in the second and third quarters. As of right now, growth in the first quarter of 2015 (or the current one) should be roughly 2.8 percent, and I am still forecasting growth of around 3 percent for all of 2015.
Looking specifically at the fourth quarter report, the underlying trends remained the same. Consumer and business spending contributed positively to overall growth, collectively adding 3.67 percentage points to real GDP for the quarter. Americans spent 4.5 percent more at the annual rate on goods, helping to buoy the overall economy. Nonresidential fixed investment rose an annualized 4.8 percent, which, while slower than the prior two quarters, was still a decent pace. Equipment spending was a soft spot, with reduced levels for computers and industrial and transportation equipment. In addition, spending on inventories added just 0.12 percent to real GDP growth instead of 0.82 percent as originally estimated.
In contrast, net exports and government expenditures served as significant drags on growth in the fourth quarter, collectively subtracting 1.47 percentage points from real GDP. Growth in exports slowed significantly, down from 7.5 percent growth in the third quarter to 2.3 percent in the fourth quarter. At the same time, goods imports picked up, increasing at a, 11.1 percent annual rate in the fourth quarter. This was stronger than the 9.8 percent pace in the earlier estimate. As a result, net exports (or exports minus imports) subtracted 1.15 percent from real GDP. With a stronger U.S. economy, one would expect imports to pick up, but weaknesses abroad have hurt manufacturers’ ability to increase their international sales.
At the same time, government spending once again served as a drag on growth, reducing real GDP in the fourth quarter by 0.32 percentage points. This stemmed primarily from lower federal defense spending, which had increased in the third quarter on end-of-fiscal-year expenditures.
Chad Moutray is the chief economist, National Association of Manufacturers.