U.S. Economy Posts Strongest Growth in More Than a Decade
GDP Grows at 5% Rate, Supported by Consumer Spending, Business Investment
By Eric Morath And Ben Leubsdorf
Updated Dec. 23, 2014 8:06 p.m. ET
The U.S. economy is rounding out 2014 in a sweet spot of robust growth, sustained hiring and falling unemployment, stirring optimism that a postrecession breakout has arrived.
A fuller picture of the year-end trends emerged Tuesday when the Commerce Department, in separate reports, said the U.S. economy expanded at a 5% seasonally adjusted annual rate in the third quarter, its strongest pace in 11 years, and reported that consumer spending accelerated last month amid rising incomes and falling gasoline prices.
“It appears we’ve reached an inflection point,” said John Canally, economist at LPL Financial.
But while investors cheered the sense that the economy could shift to a higher rate of growth, driving the Dow Jones Industrial Average above 18000 for the first time, a big question remains: Can consumers sustain the momentum into 2015?
There still are signs the economy is far from full health. Inflation remains low and has sagged lower in recent months, largely because of falling oil prices. Low inflation and sagging commodities prices are a possible signal of weak underlying demand, particularly overseas.
Wage growth remains sluggish, though there have been glimpses in recent data of a potential pickup. Gains in labor productivity have been slow.
These realities present something of a quandary to the Federal Reserve as policy makers try to judge how soon a healthier economy can handle rising interest rates, even if inflation continues to undershoot their 2% goal.
“The Fed is likely to look through much of the weakness” in inflation figures “with such impressive growth,” BNP Paribas economist Bricklin Dwyer said. Most Fed officials expect to begin raising rates, which have been near zero for six years, sometime in 2015.
Driving expectations for rising rates is an economy that logged its best quarterly growth in more than a decade.
U.S. gross domestic product, the fullest measure of economic output, was shown in the Commerce Department’s third estimate to have expanded at a 5% pace in the third quarter—up from the second quarter’s growth rate of 4.6% and the strongest pace since the third quarter of 2003.
The growth was buoyed by consumer spending on health care and restaurant meals, business investment in equipment and new software, and a rise in exports.
But the economy likely hasn’t maintained the third quarter’s heady growth pace during the fourth quarter in part because the summer months were supported by an unusually large increase in military spending that analysts don’t expect to be repeated.
Additionally, weakness around the world could reduce demand for U.S.-made products, and a stronger dollar could further depress exports by making them more expensive overseas. After two solid quarters, business spending showed signs of weakening in the final months of 2014. Falling oil prices could dent some domestic drilling projects, reducing capital expenditures and employment in some areas. And the housing sector remains shaky.
Indeed, economic growth has been uneven and halting since the recession ended in mid-2009 and previous periods of seemingly strong growth during the recovery proved short-lived. The U.S. posted two strong quarters of growth in the second half of 2013, then ran aground amid harsh winter weather.
The first quarter’s unexpected GDP contraction means Fed officials expect full-year growth will come in below 2.5%, marking 2014 as only a slight pickup from recent years. But officials see growth strengthening to between a 2.6% to 3% rate in 2015, according to economic projections released last week.
Private economists see fairly healthy growth for the U.S. in the fourth quarter ending next week. J.P. Morgan Chase on Tuesday projected GDP growth at a 2.5% pace. Macroeconomic Advisers and Barclays predicted a GDP growth rate of 2.8%, while Bank of America Merrill Lynch predicted a 3% pace.
Economists’ views on fourth-quarter growth were colored by a host of economic data released Tuesday.
New orders for durable manufactured goods—products like airplanes, cars and heavy machinery that are designed to last at least three years—fell 0.7% in November from the prior month, the Commerce Department said Tuesday. Orders for nondefense capital goods excluding aircraft, a proxy for business spending, were flat last month after falling in September and October.
The housing market has yet to return to prerecession levels despite low mortgage rates and strong job growth. Sales of new single-family homes fell for the second straight month in November and are essentially unchanged this year from 2013, the Commerce Department said Tuesday.
Inflation, meanwhile, remains tame. The Fed’s preferred gauge, the Commerce Department’s personal consumption expenditures price index, slipped to a 1.2% annual gain in November from 1.4% in October. It was the 31st consecutive month that inflation undershot the central bank’s 2% target.
Falling energy prices helped drive down that inflation reading. Excluding the categories of food and energy, prices were flat in November from the prior month and rose 1.4% from a year earlier, ticking down from 1.5% annual growth for core prices in October.
But consumer spending, which generates more than two-thirds of economic output, could offer underlying strength and help the economy power through the headwinds. Household spending rose 0.6% in November from the prior month and 4% from a year earlier, the Commerce Department said Tuesday.
“The consumer drives the bus in this economy,” said Scott Brown , economist at Raymond James & Associates. Gains in household spending, he said, “should support overall economic growth in the first half of next year.”
The decline in energy prices, while dragging down overall inflation, gives consumers a boost in the form of cheaper gasoline. Fed Chairwoman Janet Yellen last week said the global plunge in oil prices is “likely to be, on net, a positive” for the U.S., comparing lower prices to a tax cut.
Yet cheaper gas is only part of the story. Job creation this year has been the strongest since 1999. The unemployment rate was 5.8% last month, down from 7% a year earlier, according to Labor Department data.
Personal income rose 0.4% last month from October and climbed 4.2% from a year earlier, the largest annual income gain since December 2012, the Commerce Department said.
Consumers are ending 2014 feeling upbeat, a good omen for household spending. The final December consumer-sentiment index from the University of Michigan, released Tuesday, was 93.6, up from November’s final reading of 88.8. The report said improvement in the labor market, more than falling gas prices, is driving consumers to feel better about the economy.
Same-store sales are up 10.9% this year at Tropical Smoothie Café LLC, an Atlanta-based chain of 412 smoothie and sandwich shops. “The stock market is up, gas prices are down and even home values are coming back,” Chief Executive Mike Rotondo said. People, he said, seem “more bullish.”
—Jonathan House, Kathleen Madigan and Josh Mitchell contributed to this article.
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