U.S. economic growth slowed in the fourth quarter and likely cooled even further in the first quarter as severe winter weather took its toll. But the outlook for the rest of the year looks brighter, thanks to a recovering job market that should boost consumer spending.
The Commerce Department said Friday that the overall economy, as measured by the gross domestic product, grew at an annual rate of 2.2 percent in the October-December period — a figure that was unchanged from a month ago. The economy surged at a 5-percent rate in the third quarter.
In the third and final look at fourth quarter GDP, consumer spending was more robust than previously estimated but business restocking was weaker.
Consumer spending, which accounts for 70 percent of economic activity, grew at a 4.4-percent rate in the fourth quarter — the strongest performance in eight years and even better than the 4.2-percent estimated a month ago. Export growth was also stronger than previously estimated, but those gains were offset by slower growth in business inventories, leaving total GDP unchanged.
The report also showed that inflation was well under control. A price measure tied to GDP rose just 0.1 percent in the fourth quarter. Excluding food and energy, prices rose a modest 1.1 percent. Analysts said the gain reinforced Federal Reserve's view that inflation was continuing to fall below its target of 2 percent.
"The economy was on solid footing at the end of the year, while inflation and inflation expectations continue to ratchet lower than expected," said Bricklin Dwyer, an economist at BNP Paribas.
Economic growth for all of 2014 was also unchanged at 2.4 percent, only a tiny improvement from the 2.2-percent growth seen in 2013. For the past five years, growth has averaged a subpar 2.2 percent. Economists, however, believe strong gains in consumer spending will propel growth to a rate of at least 3 percent in 2015, which would be the best performance in a decade.
In 2014, the economy actually shrank at an annual rate of 2.1 percent in the first quarter as the country was hit by a series of severe winter storms. Growth rebounded to a 4.6-percent rate in the spring and a 5-percent rate in the third quarter in the strongest performance in 11 years.
But growth slowed in the fourth quarter, and the deceleration is expected to extend into the January-March period, reflecting the impact of winter storms and shipping disruptions from a West Coast port dispute.
The current economic expansion will mark its sixth anniversary in June, meaning it will have already lasted 14 months longer than the average expansion in the post-World War II period.
A slow moving recovery comes with benefits, too. More rapid recoveries often lead to overindulgences that can undo all that has been gained.
"This recovery has been disappointing in terms of growth so far but if you are looking for a silver lining, it is that the slow rate of growth has allowed the economy to avoid the kinds of excesses that can lead to over-building, over-lending or other problems," said Mark Zandi, chief economist at Moody's Analytics. "We are a long way from that."
Looking far into the future, Zandi said the current expansion may only be at the half-way point, meaning it could last another six years.
The longest recovery on record was the 10-year expansion that lasted from March 1991 to March 2001. But many economists believe this expansion could surpass that.
Part of Zandi's optimism stems from his belief that with inflation currently so low, the Fed will be able to move gradually when it starts raising rates, something economists believe will occur later this year. And with the Fed's target rate at a record low near zero, it will be some time before rates are increased to the point where they slow borrowing activity and overall economic growth.
Many economists believe that at most, the Fed will move rates in two small quarter-point moves this year, leaving them below 1 percent at the end of 2015. That was the previous record low before the current six-year stretch of rates near zero.
Nariman Behravesh, chief economist at IHS Global Economics, thinks that growth will rebound to a solid 3.4-percent rate in the April-June quarter and remain strong for the rest of the year.
He believes that the job growth seen over the past year, the strongest in 17 years, will energize consumer spending, which accounts for 70 percent of the economy.
"Consumers are going to be the engine of growth for the U.S. economy this year," Behravesh said.
Behravesh believes that growth slowed in first three months of this year because of harsh weather and a West Coast port dispute that disrupted supply lines. Yet it won't be anything like last year when a series of storms combined with other factors to send the economy into a sharp contraction.
"We are going through a soft patch but it is nothing like what we saw a year ago," he said.