The U.S. economy slowed more sharply in the final three months of the year than initial estimates, reflecting weaker business stockpiling and a bigger trade deficit.
The Commerce Department said Friday that the economy as measured by the gross domestic product grew at an annual rate of 2.2% in the October-December quarter, weaker than the 2.6% first estimated last month. It marked a major slowdown from the third quarter, which had been the strongest growth in 11 years.
Economists remain optimistic that the deceleration was temporary. Many forecast that growth will rise above 3% in 2015, which would give the country the strongest economic growth in a decade. They say the job market has healed enough to generate strong consumer spending going forward.
The economy is “doing just fine,” said Paul Ashworth, chief U.S. economist at Capital Economics, who noted that although GDP growth slowed in the fourth quarter, the U.S. added an average of 284,000 new jobs from October through December.
For all of 2014, the economy expanded 2.4%, up slightly from 2.2% in 2013.
Consumer spending, which accounts for 70% of economic activity, was a bright spot in the fourth quarter. It expanded at an annual rate of 4.2%, down slightly from the first estimate of 4.3% but still the best showing since the first quarter of 2006.
Friday’s report was the second of three estimates for fourth-quarter GDP, the broadest measure of the economy’s total output of goods and services.
Sal Guatieri, senior economist at BMO Capital Markets, said that “while the economy ended the year with less momentum than in the summer and fall, average annual growth of 2.9% in the past six quarters still denotes a meaningful upward shift from 2.1% in the first four years of the recovery.”
The downward revision stemmed largely from slower stockpiling by businesses. Last month, the rise in inventories was estimated to have added 0.8 percentage points to fourth-quarter growth. But that was lowered to a contribution of just 0.1 percentage points in the new estimate. The change, however, will probably translate into stronger growth in the current quarter because businesses will not have to deal with unsold goods.
Trade also weighed more heavily on growth than first thought, subtracting 1.2 percentage points as imports grew much more strongly than first thought. That could be a reflection of the rising value of the dollar, which makes imported products cheaper for U.S. consumers.
Many analysts believe 2015 will start slowly, in part reflecting the disruptions caused by a rough winter. However, it’s unlikely to be as bad as the first quarter of 2014, when heavy snow and cold contributed to a 2.1% plunge in growth in the first quarter of 2014.
That big drop was followed by sizzling growth rates of 4.6% in the second quarter and 5% in the third quarter.
Analysts are looking for less of a roller-coaster ride this year. JPMorgan economists say growth will come in around 2.5% in the current quarter and then hover between 2.5% to 3% for the rest of the year. They are forecasting growth of 3.1% for the entire year, a significant improvement from the 2.4% growth seen in 2014.
If the forecast proves accurate, it would be the best GDP performance since the economy grew by 3.3% in 2005, two years before the beginning of worst economic downturn the country has experienced since the 1930s.
Joel Naroff, chief economist at Naroff Economic Advisors, is even more optimistic. He’s forecasting economic growth of 3.5% this year.
Naroff and other economists believe the key to the economy shifting into a higher gear will be further improvements in the labor market, when stronger job gains leading to rising wage gains.
“I see 2015 as a really good year for consumer spending because of the wage gains,” Naroff said.
Even though the recession ended nearly six years ago, wage growth has been weak as businesses were able to pay less with so many unemployed looking for jobs.
Several large companies — including retailers TJX and The Gap, as well as health insurer Aetna — have already signaled a willingness to pay more to retain workers.
News last week that Wal-Mart, the nation’s largest private employer, would also increase its minimum pay could be a sign that a tighter labor market is finally leading to increased wages, some analysts believe.
The unemployment rate has fallen to 5.7%.
Federal Reserve Chair Janet Yellen, testifying before Congress this week, listed stronger wage growth as one of the elements the central bank is looking for before deciding to raise interest rates. She said as long as wage gains remained weak and inflation low, the Fed was prepared to remain “patient” in moving to raise rates.
Many private economists believe the Fed’s first move to increase its key rate, which has been near a record low of zero for six years, will not come until June at the earliest.