Upbeat Consumers Propel U.S. Fourth-Quarter Growth: Economy

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Consumer spending last quarter climbed by the most in four years, underscoring the underlying strength of the expansion.

Consumer spending last quarter climbed by the most in four years, underscoring the underlying strength of the expansion.

Photographer: Emile Wamsteker/Bloomberg

American households picked up spending in the fourth quarter and remained confident in early 2015, indicating the economy is poised to overcome any bumps caused by slower global demand.

The biggest gain in consumer purchases in four years helped gross domestic product expand at a 2.2 percent annualized rate at the end of 2014, although that was less than previously estimated, according to Commerce Department data issued Friday in Washington. Other reports showed household sentiment held close to an 11-year high, manufacturing in the Chicago area shrank and more people signed contracts to buy a home.

An improving job market and genrally cheaper fuel probably will help sustain consumer spending, which accounts for almost 70 percent of the economy. That will be critical in supporting the expansion as the lingering effects of the work stoppage at West Coast ports and harsh winter weather, combined with a rising dollar and slower growth among trading partners, hold back American factories.

“The consumer looks relatively solid,” said Michael Carey, chief economist for North America at Credit Agricole CIB in New York. “We’re looking at an increase in domestic demand, which is good because we’re one of the few economies out there that is growing relatively strongly.”

Stocks fell, paring the best month for the Standard & Poor’s 500 Index since 2011, as technology shares slumped. The S&P 500 declined 0.3 percent to 2,104.5 at the close in New York.

Revised Down

The GDP reading was revised down from a prior estimate of 2.6 percent, restrained by a smaller gain in stockpiles and widening trade gap.

The median forecast of 83 economists surveyed by Bloomberg called for a 2 percent advance. Projections ranged from 1.5 percent to 2.5 percent. This is the second of three estimates for the quarter, with the final release scheduled for March when more information can be incorporated.

The University of Michigan’s final consumer sentiment index for February came in at 95.4 compared with the prior month’s 98.1 that was the highest since the start of 2004. It was the first time the gauge decreased in seven months and represented an improvement from a preliminary reading of 93.6.

“Ultimately, the strong job environment and strong U.S. economy are playing a big role in supporting consumer confidence,” said Jennifer Lee, senior economist at BMO Capital Markets in Toronto.

Consumer Spending

The GDP report showed household consumption grew at a 4.2 percent annualized rate in the fourth quarter, the most since the last three months of 2010. Demand for services climbed 4.1 percent, the most since 2000.

Revisions to third-quarter personal income also showed the picture brightening. Wages and salaries rose by $87.2 billion, a $20.5 billion improvement from the prior estimate. Preliminary data for the fourth quarter showed a $94.4 billion advance.

Job growth has strengthened over the past year, with payrolls rising 257,000 in January to cap their strongest three-month run in 17 years.

Companies such as Target Inc. are benefiting from the improvement in consumers’ balance sheets. The Minneapolis-based company posted earnings for its fiscal fourth quarter that topped analysts’ estimates, lifted by a gain in holiday sales.

‘Healthier’ Consumer

“We recognize that the consumer confidence has certainly improved,” Chief Executive Officer Brian Cornell said in a Feb. 25 conference call, adding that lower gasoline prices have been helping the retail industry. “The consumer, we do believe, is healthier, and we’re pleased that they are spending in our stores, both in our stores and online.”

Federal Reserve policy makers are expecting growth to pick up this year, as they weigh the timing of their first interest rate increase since 2006. The central tendency of Fed-official estimates projects GDP will climb between 2.6 percent and 3 percent.

“If economic conditions continue to improve, as the Committee anticipates, the Committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis,” Fed Chair Janet Yellen said in congressional testimony on Feb. 24-25. GDP “is expected to be strong enough to result in a further gradual decline in the unemployment rate.”

Manufacturing Struggling

One area struggling to sustain momentum recently has been manufacturing. The Institute for Supply Management-Chicago Inc.’s business barometer slumped to 45.8 in January from 59.4 the prior month, according to a report Friday.

It was the first time the measure dropped below 50, signaling contraction, since April 2013. The 13.6 point plunge was the second-biggest in data going back to 1979, only behind a 19.2 point plunge at the height of the meltdown in financial markets in October 2008.

The magnitude of the drop suggests special circumstances, such as the work stoppage at West Coast ports or bad weather, were at play, although that’s difficult to prove, economists said.

“It’s first and foremost likely a distortion from the port effect,” said Michael Gapen, the New York-based chief U.S. economist at Barclays Plc.

The number of days it took to source capital equipment was the most since 2008, the Chicago report showed.

The effects of a recently resolved dockworker contract dispute are still rippling through the U.S., as the nation’s two busiest seaports -- Los Angeles and Long Beach -- work through their biggest backlog of ships in a decade.

Port Slowdown

The Pacific Maritime Association, which represents management, and the International Longshore and Warehouse Union, representing 20,000 dockworkers, reached the deal on a five-year contract Feb. 20 after U.S. Labor Secretary Tom Perez imposed a deadline to resolve the nine-month dispute. The conflict had led to backups that stranded merchandise at sea, while retailers and manufacturers sent products by air and diverted to ports on the East and Gulf Coasts.

The influence of a rising dollar, which makes American goods more expensive for foreign customers, will be more difficult to overcome. The dollar index, a gauge of its value against major world currencies, climbed Thursday to the highest level in more than a decade.

A worsening trade deficit already hurt the world’s largest economy last quarter, although it was due to a surge in imports as American consumers spent more. The difference between exports and imports shaved 1.15 percentage point from growth, according to the Commerce Department’s GDP report.

Inventory Situation

Stockpiles grew at a slower pace than previously projected, rounding out the biggest culprits behind the downward revision in GDP.

Stripping out inventories and trade, the two components of GDP that are most vulnerable to swings, so-called final sales to domestic purchasers increased 3.2 percent, exceeding the previously reported 2.8 percent advance.

“Despite all the crosscurrents that we’re seeing across the world, the consumer is most likely to drive growth in 2015 for the U.S. economy,” said Sam Bullard, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “Fundamentals for the consumer remain supportive for increased consumer spending in 2015, reflecting healthy job growth and low inflation that is increasing purchasing power.”

A report showing more Americans signed contracts to purchase previously owned homes in January rounded out a week of housing data that depicted an uneven recovery. The index of pending sales climbed 1.7 percent after a 1.5 percent drop the prior month that was smaller than initially estimated, according to data from the National Association of Realtors.

Economists consider pending sales a leading indicator because it tracks contract signings, as opposed to purchases of existing homes, which are tabulated when a deal closes, typically a month or two later.

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