US GDP slows sharply in fourth quarter on weak consumer spending

The US economy barely grew in the final three months of 2015, rising at an an anaemic 0.7% annual rate amid signs of a global economic slowdown.

Both consumers and businesses cut back on spending and US exports were hurt by economic weakness in overseas markets. Economists surveyed by the Wall Street Journal had been expecting a marginally higher number, 0.8%, and the news is likely to renew fears that the six-and-a-half-year economic expansion is losing momentum.

This was the Commerce Department’s first estimate of gross domestic product (GDP) for the quarter, the broadest measure of an economy’s strength, and may be revised up or down. Fourth quarter GDP has slowed sharply on a number of occasions since the end of the recession only to bounce back in the spring.

Friday’s estimate was less than half the 2% annual growth rate in the third quarter and was the weakest showing since a severe winter reduced growth to a 0.6% annual rate in last year’s first quarter.

US GDP figures.

It comes amid global stock market turmoil driven by fears of an economic slowdown in China and collapsing oil prices which have led to job losses and cuts in investment in the US’s once booming domestic oil business.

Earlier this week the UK announced its GDP growth had slowed in 2015 to 2.2% over the year, down from 2.9% in 2014.

Activity in the US should rebound in the current January to March period, though economists worry that China’s troubles and sinking oil and stock prices could dampen the recovery.

Paul Ashworth, chief US economist at Capital Economics, called the slowdown “a temporary blip” and said growth would likely rebound next quarter. Next Friday the Labor Department will release its latest jobs report, and the US is expected to have added another 210,000 in January.

“People love doom and gloom. We had this the same time last year,” said Ashworth. “But GDP grew 2.4% last year and 2.4% the year before, that’s pretty good. It’s been enough to drive the unemployment rate down to 5% from 10% [at the peak of the recession].”

A boost this year is expected to come mainly from consumer spending, which typically fuels about two-thirds of economic activity. Continued solid job growth could embolden consumers to spend more. Personal consumption rose 2.2% in the fourth quarter, down from 3% in the third quarter.

The Federal Reserve issued a cautious assessment of the economy this week, leaving interest rates unchanged after raising its benchmark short-term rate in December from record lows.

Many analysts think that economic weakness, subpar inflation and global pressures will cause the Fed to slow its pace of rate hikes this year from what had been expected to be four increases to perhaps only two.

For all of 2015, economists have estimated that the economy grew around 2.3%, about equal to the 2.4% growth for 2014. That would continue the economy’s pattern of growth since the Great Recession officially ended in June 2009.

For 2016, economists are forecasting another year of modest growth of around 2%. At the same time they have nudged up the prospects for a recession this year. While still low, the likelihood is now put at around 20%, though most analysts still see an outright recession as unlikely.

Many economists expect the strength in the domestic economy to offset weakness in export sales and in the US energy sector, which has been slashing investment in response to the plunge in energy prices.

While economic growth was lackluster last year, hiring was not. The economy added an average of 284,000 jobs a month in the final quarter of last year.

Mark Zandi, chief economist at Moody’s Analytics, has said he expects strong job growth to keep lowering unemployment and to help boost wages, which have lagged in this recovery. He said the extra consumer spending, which will be aided by lower gas prices, will likely support economic growth of around 2.5% in 2015.

Growth at that level is above the economy’s potential right now, which many analysts put at around 2%, reflecting a slower pace of people entering the job market and slower productivity growth.

The Associated Press contributed to this report