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Economy in U.S. expanded less than forecast last quarter

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(Bloomberg) — The economy in the U.S. expanded at a slower pace than forecast in the fourth quarter as cooling business investment, a slump in government outlays and a widening trade gap took some of the luster off the biggest gain in consumer spending in almost nine years.

Gross domestic product grew at a 2.6 percent annualized rate after a 5 percent gain in the third quarter that was the fastest since 2003, Commerce Department figures showed Thursday in Washington. The median forecast of 85 economists surveyed by Bloomberg called for a 3 percent advance. Consumer spending, which accounts for almost 70 percent of the economy, climbed 4.3 percent, more than projected.

Swept up by the cheapest gasoline in years and the biggest employment increase since 1999, households are gaining the confidence to spend more freely, which will bolster the odds the world’s biggest economy can escape a global slowdown unscathed. Engaged consumers will help ensure that most American employers will look to expand, even as the decline in oil hurts companies such as Caterpillar Inc.

The expansion last quarter was “all about a solid consumer performance,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, who correctly forecast the fourth-quarter growth rate. “Overall, the number has returned to trend growth after a couple of really hot quarters.”

Stocks Fall

Futures on the Standard & Poor’s 500 Index stayed lower after the reports, falling 1.1 percent to 1,996.7 at 8:52 a.m. in New York. The yield on the 10-year Treasury note was also lower at 1.68 percent compared with 1.75 percent on Thursday.

GDP estimates in the Bloomberg survey of economists for fourth-quarter GDP, the value of all goods and services produced, ranged from 1.8 percent to 3.6 percent. The GDP estimate is the first of three for the quarter, with the other releases scheduled for February and March when more information becomes available.

The gain in household consumption was the biggest since the first quarter of 2006 and compared with a 4 percent median forecast in the Bloomberg survey. It followed a 3.2 percent advance from July through September. Purchases added 2.9 percentage points to growth.

For all of 2014, the U.S. economy grew 2.4 percent from the year before, the most in four years and following a 2.2 percent advance in 2013. Consumption climbed 2.5 percent, the most since 2006.

Business Investment

For the fourth quarter, fixed business investment increased at a 2.3 percent annualized rate, compared with a 7.7 percent gain in the third quarter. Corporate spending on equipment dropped at a 1.9 percent pace, the biggest decline since the second quarter of 2009.

The trade deficit widened to $471.5 billion, as imports climbed three times faster than exports. The gap subtracted 1 percentage point from GDP.

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

The GDP report also showed government spending decreased at a 2.2 percent pace, subtracting 0.4 percentage point to overall growth as defense spending slumped by the most in two years.

Fed Liftoff

Federal Reserve policy makers are monitoring economic progress as they weigh their first interest rate increase since 2006. In a statement following a meeting this week, the central bank acknowledged global risks, saying that it will take into account readings on “international developments” as it decides how long to keep rates low.

Meanwhile, U.S. “economic activity has been expanding at a solid pace,” the Fed said in the statement as it maintained its pledge to be “patient” on raising interest rates. “Labor market conditions have improved further, with strong job gains and a lower unemployment rate.”

Companies and consumers will need more evidence the U.S. economy can sustain its momentum in the face of global headwinds, which include a plunge in commodity prices and the threat of deflation in Europe.

The cost of oil had dropped almost 60 percent since last year’s peak, resulting in a financial windfall for consumers as gas prices also declined. A regular gallon of gasoline cost an average $2.05 as of Jan. 29, hovering near the lowest level since March 2009.

More confidence

That’s being reflected in consumer confidence. The University of Michigan preliminary consumer sentiment index for January rose to an 11-year high while the Conference Board’s measure increasing to the highest level since August 2007.

While the gas-fueled confidence kicks may encourage households to spend more, the decline in oil prices has pinched companies such as Caterpillar.

The Peoria, Illinois-based machinery manufacturer said lower oil and gas prices are “without a doubt” the biggest reason it’s expecting sales to decline to $50 billion in 2015, Michael DeWalt, Caterpillar’s vice president of finance services, said on a Jan. 27 conference call. The median estimate from analysts had projected revenue of $55.2 billion. “With oil this low, we expect substantial reductions” in spending by fuel producers, he said.

The labor market has yet to show signs of slowing. Employment grew in 2014 by almost 3 million, the most in any year since 1999, Labor Department data showed this month.

Rising income

Those gains are helping worker pay grow. After-tax personal income adjusted for inflation climbed at a 3.8 percent annualized rate in the fourth quarter, the most since mid-2013.

One reason earnings are growing more quickly is that inflation is tame. The price index tied to consumer spending dropped at a 0.5 percent rate in the fourth quarter, the most in almost six years. Excluding food and fuel, it rose 1.1 percent, the smallest gain since the second quarter of 2013.

Fed policy makers and economists alike are watching for signs that the improved labor market is translating into wage gains, which have been slow to materialize throughout the recovery. The employment cost index, which includes wages and benefits, climbed 0.6 percent in the last three months of 2014 compared with a 0.7 percent gain in the previous three months, a Labor Department report showed Friday. Wages climbed 0.5 percent, the least since the first quarter of 2014.

–With assistance from Chris Middleton in Washington.


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