February 4, 2015

US economy encounters headwinds during fourth quarter

The U.S. economy encountered some challenges during the fourth quarter, as weakness abroad and tepid business spending combined to limit fourth-quarter growth.

Fourth-quarter growth modest
Gross domestic product expanded 2.6 percent during the last three months of the year, roughly half the 5.0 percent rate enjoyed during the previous quarter, according to Commerce Department figures. The data showed the U.S. economy grew 2.4 percent during 2014.

This figure fell far short of the 4 percent rate experienced during the late 1990s, and came very close to the average rate of expansion experienced during the more than six-year recovery, according to The Wall Street Journal. The government report, while providing a modest figure for GDP, otherwise offered a mixed bag in terms of its data.

Trade gap worsens
The recent slowdown in global growth reduced demand for U.S. goods, and at the same time, a stronger dollar gave consumers greater incentive to purchase foreign goods, the media outlet reported. These dual pressures caused the trade gap to grow, cutting an entire percentage point off quarterly GDP.

Spending surges
While the trade gap's increase was the single largest detractor from growth during the period, spending helped offset this negative impact. Personal consumption expenditures rose 4.3 percent in the fourth quarter, after increasing 3.2 percent in the third. During this time, Americans bought 3.7 percent more services, while consumption of durable and nondurable goods increased 7.4 percent and 4.4 percent, respectively.

Dual tailwinds of falling gasoline prices and a sharp increase in hiring made it easier for households to participate in their largest spending spree in close to nine years, according to The Wall Street Journal. Unfortunately, companies were not as liberal in their expenditures, decreasing their capital spending after forking out cash for equipment during the spring and summer.

"Outside of consumer spending, it's hard to argue for a lot of momentum," said Scott Hoyt, senior director for Moody's Analytics, the Wall Street Journal reported.

Sharp declines in oil
While many Americans have benefited substantially from oil's recent declines - which have resulted in the energy source's value plunging roughly 60 percent over the last seven months - many view the commodity's price as a barometer of both consumer and industrial demand, according to CNBC. The markets have been providing some disheartening news about the U.S. economy, and if this trend continues, many sectors could feel a pinch.

Banks, for example, could potentially suffer a drop in loan origination - and the revenue produced by this activity - if the plight of American consumers worsens. Another problem that could potentially impact this industry is rising defaults. If economic conditions go south, many borrowers could have a hard time making good on their debts.