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US Q4 growth moderates to 2.6%, slowdown seen short-lived

WASHINGTON — United States economic growth slowed in the fourth quarter as weak business spending and a wider trade deficit offset the fastest pace of consumption since 2006, but the slowdown is expected to be short-lived given the enormous tailwind from lower oil prices.

Consumer spending, which accounts for more than two-thirds of America’s economic activity, advanced at a 4.3 per cent pace in Q4, the fastest since Q1 2006. Photo: Reuters

Consumer spending, which accounts for more than two-thirds of America’s economic activity, advanced at a 4.3 per cent pace in Q4, the fastest since Q1 2006. Photo: Reuters

WASHINGTON — United States economic growth slowed in the fourth quarter as weak business spending and a wider trade deficit offset the fastest pace of consumption since 2006, but the slowdown is expected to be short-lived given the enormous tailwind from lower oil prices.

Gross domestic product expanded at a 2.6 per cent annual pace in the October-to-December period after the third quarter’s spectacular 5 per cent rate, the Commerce Department said in its first estimate of growth yesterday.

The slowdown, which follows two back-to-back quarters of very strong growth, was worse than economists’ median forecast of a 3 per cent expansion. However, most economists believe the fundamentals in the US are strong enough to cushion the blow on growth from weakening overseas economies.

Even with the moderation in the fourth quarter, growth remained above the 2.5 per cent pace, which is considered to be the economy’s long-term potential. For all of last year, the world’s largest economy grew 2.4 per cent, picking up from the 2.2 per cent expansion in 2013.

The report came two days after the US Federal Reserve said the economy was expanding at a solid pace, an upgraded assessment that keeps it on track to start raising interest rates this year. The US central bank has kept its short-term interest rate near zero since December 2008 and most economists expect a mid-year lift-off.

Consumer spending, which accounts for more than two-thirds of US economic activity, advanced at a 4.3 per cent pace in the fourth quarter — the fastest since the first quarter of 2006 and an acceleration from the third quarter’s 3.2 per cent pace.

Government data showed petrol prices have plunged 43 per cent since June, leaving Americans with more money for discretionary spending. A strengthening labour market, despite sluggish wage growth, is also a boost.

“We are seeing a number of positive developments. Businesses are hiring aggressively and the big drop in gasoline prices means that people have more money to spend on other items,” said Mr Mark Zandi, chief economist at Moody’s Analytics.

The strong pace of consumer spending, however, was overshadowed by a drop in capital expenditure, with business spending on equipment falling at a 1.9 per cent rate in the fourth quarter, the largest contraction since the second quarter of 2009.

Business spending on equipment had advanced at an 11 per cent rate in the third quarter. Last quarter’s weakness could reflect cuts or delays in undertaking investment projects by companies in the oil industry, but it could also be a correction after two back-to-back quarters of robust gains.

The trade deficit widened to US$471.5 billion (S$638 billion), as slower global growth curbed exports and solid domestic demand sucked in imports, subtracting 1.02 percentage points from GDP growth in the fourth quarter. Trade had added 0.78 percentage point to third-quarter growth.

A surge in inventories helped make up for some of the shortfall in trade. Stockpiles grew at a US$113.1 billion rate, an increase of US$30.9 billion from the third quarter, adding 0.8 percentage point to growth.

Other details of the report were mixed. Government spending decreased at a 2.2 per cent pace, subtracting 0.4 percentage point to overall growth as defence spending slumped by the most in two years. Meanwhile, housing construction made a mild contribution to GDP growth. AGENCIES

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