WASHINGTON DC, USA – The US economy grew at its fastest pace in four years in 2014, outpacing all of the other major developed countries as consumers gained confidence helped by sinking oil prices.
But a slowdown in the fourth quarter bared some of the persistent challenges – like the strong dollar – to locking the world's largest economy into higher gear.
While the halving of fuel prices clearly gave American consumers the power to spend more at the end of the year, businesses slowed investment and the government cut back on spending, especially for defense, dragging down momentum.
The Commerce Department reported Friday, January 30, that US gross domestic product grew at an annual 2.4% pace last year, up from 2.2% in 2013, as the United States distanced itself from the sagging economies of Europe and Japan.
The firming recovery from the Great Recession of 2008-2009 was marked by improved consumer confidence, the best year of job creation since 1999, and a surge in business profits.
By comparison, Japan and the eurozone continue to battle with recessionary pressures; China – the other key motor of global growth – is slowing more than expected; and other emerging economies are also struggling with slumping activity, partly because of the crash in commodity prices.
That has put the US on a divergent policy course with the others: while their central banks are implementing measures to stimulate demand and head off deflation, the US Federal Reserve is moving to tighten monetary policy and raise interest rates in the coming months.
Strong dollar a challenge
Even so, the Commerce Department's first estimate of fourth-quarter activity showed the United States is not completely in the clear.
Following a bristling 5.0% pace of expansion in the third quarter, GDP grew at a 2.6% rate in the October-December period, slower than the 3.2% expected by economists.
On the positive side, consumer spending accelerated as shoppers took advantage of the savings on cheaper gasoline to spend elsewhere.
On the other hand, businesses – likely including companies in the oilfield – pulled back in the October-December period and government spending contracted, especially on defense.
Moreover, the dollar, which has gained about 15% against a basket of currencies over the past year, likely spurred a pickup in imports and held back exports, a negative for GDP growth.
"There is a clear dichotomy between consumers, benefiting from cheap gas and a strong dollar, and businesses, suffering from cheap oil and the strong dollar," said Chris Low of FTN Financial.
Dean Baker of the Center for Economic and Policy Research in Washington called the slowdown predictable.
"Third-quarter growth was driven in part by a 16.0% jump in military spending. Military spending is highly erratic and sharp swings are usually reversed," he said.
On the other hand, he added, "Trade was a major drag on fourth-quarter growth and will continue to be if the dollar stays high."
Deutsche Bank economist Joseph LaVorgna said in a client note that the opposing forces will persist in moderating, but not stifling, growth.
"The economy should continue to be buffeted by near-record low interest rates and plunging energy costs. This should offset any further tightening in financial conditions emanating from a stronger dollar."
He pointed out that there were no new flags that would push the Federal Reserve to accelerate plans for increasing interest rates, expected sometime around mid-year.
The GDP data showed inflation tame, and a separate report on employee compensation showed no wage pressures.
"The key issue for policymakers is whether a further tightening in the labor market will engender a pickup in wage pressures by mid-year such that the process of interest rate normalization can commence. In this regard, the Q4 employment cost index suggests the Fed can remain 'patient'."
Wall Street stocks, on edge over a mixed bag of corporate earnings, closed sharply lower, the S&P 500 losing 1.28% and the Dow Jones Industrial Average 1.39%.
The dollar was little-changed, rising to $1.1289 per euro, and slipping to 117.45 yen. – Rappler.com