Economy in US Grew 3.2% as Consumer Spending Picked Up

Bloomberg News

The U.S. economy expanded at a 3.2 percent pace in the fourth quarter as Americans' spending climbed the most in three years, laying the ground for further improvement in 2014.

The annualized gain in gross domestic product matched the median forecast in a Bloomberg survey and followed a 4.1 percent advance in the prior three months, Commerce Department figures showed today in Washington. Growth in the second half of the year was the strongest since the six months ended in March 2012. Consumer spending, which accounts for almost 70 percent of the economy, climbed 3.3 percent, less than estimated.

The pickup in demand allowed the economy to overcome cutbacks in government outlays caused by the partial federal shutdown in October. Diminishing fiscal challenges and progress in the labor market will probably sustain consumer and corporate demand in 2014, helping explain why the Federal Reserve decided yesterday to keep paring stimulus.

'For a period that included a government shutdown, it was a pretty successful quarter,' Sam Coffin, an economist at UBS Securities LLC in Stamford, Connecticut, said before the report. He was among the top U.S. forecasters of GDP the past two years, according to data compiled by Bloomberg. 'The momentum carries over into this year. The worst of the fiscal battles is behind us. We'll see the economy picking up.'

Another report showed applications for unemployment benefits in the U.S. rose more than forecast last week to the highest level in more than a month, partly reversing a post-holiday slump.

Jobless Claims

Jobless claims climbed by 19,000 to 348,000 in the period ended Jan. 25, which included the Martin Luther King holiday, according to Labor Department data. The reading was the highest since mid-December. The median forecast of 55 economists surveyed by Bloomberg projected 330,000.

Stock-index futures held earlier gains after the reports. The contract on the Standard & Poor's 500 Index maturing in March rose 0.3 percent to 1,776.5 at 8:34 a.m. in New York.

For all of 2013, the economy expanded 1.9 percent after a 2.8 percent increase in the prior year.

Estimates of the 87 economists surveyed by Bloomberg for fourth-quarter GDP, the value of all goods and services produced, ranged from 0.9 percent to 4.2 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.

Government Spending

Today's GDP report reflected a bigger decline in federal government spending and a downturn in home construction. The pickup in consumer purchases was accompanied by stronger business investment in equipment and an improvement in the nation's trade deficit.

The gain in household consumption compared with a 3.7 percent median forecast in the Bloomberg survey and followed a 2 percent advance from July through September. Purchases added 2.3 percentage points to growth.

Government spending fell at a 4.9 percent pace, subtracting 0.9 percentage point from overall growth. Spending by federal agencies decreased at a 12.6 percent rate. For all of 2013, federal government spending declined 5.1 percent, the most since 1971.

The 16-day partial shutdown of the federal government in October held back economic growth during the quarter. While the full effect of the shutdown can't be quantified, the Bureau of Economic Analysis estimated the effect of the reduction of hours worked cut GDP by about 0.3 percentage point.

Inventory Growth

Inventories added less to growth during the fourth quarter. Stockpiles were rebuilt at a $127.2 billion annualized pace, the biggest increase since the first three months of 1998 and an increase of $11.5 billion from the third quarter. Inventories from July through September climbed $115.7 billion, up $59 billion from the prior quarter.

The trade gap and inventories are two of the most volatile components in GDP calculations.

The trade deficit narrowed to $370.1 billion, as exports increased more than imports. The smaller gap added 1.33 percentage points to GDP growth, the most since the second quarter of 2009.

Corporate spending on equipment advanced at a 6.9 percent annualized pace, adding 0.4 percentage point. Intellectual property spending rose at a 3.2 percent rate.

Residential construction decreased at a 9.8 percent annualized rate, subtracting 0.3 percentage point from growth.

Core Inflation

The report also showed price pressures remain contained. A measure of inflation, which is tied to consumer spending and strips out food and energy costs, climbed at a 1.1 percent annualized pace.

Among businesses seeing an improvement in demand is Texas Instruments Inc., whose chips are used in almost every electronic device from parts for satellites and rockets to home appliances.

'The U.S. economy clearly seems to be stepping up its growth,' Kevin March, chief financial officer of the Dallas-based company, said on a Jan. 21 earnings call. 'Europe appears to have stopped declining, and it appears that China has stabilized. So you've got to feel better about that at this stage, starting 2014, than we did 12 months ago.'

Americans are benefiting from gains in wealth that are also lifting confidence. The S&P/Case-Shiller index of property prices in 20 cities climbed in November from a year earlier by the most since 2006. The Standard & Poor's 500 Index jumped 30 percent in 2013, its best performance since 1997.

Car Sales

Motor vehicle purchases are a bright spot for demand as households take advantage of low borrowing costs to replace older models. While bad weather restrained purchases in December, automakers completed their best sales year since 2007. Plants are stepping up hiring plans as a result.

Dearborn, Michigan-based Ford Motor Co., the second-largest U.S. automaker, plans to add 5,000 jobs in the U.S. as it introduces 16 new vehicles in North America this year.

Faster gains in employment will help to spur consumer spending this year. Economists surveyed by Bloomberg projected payrolls will rise by about 200,000 workers a month in 2014, compared with 182,000 last year and 183,000 in 2012.

In December, employment increased by 74,000 after a 241,000 jump a month earlier. The jobless rate fell to 6.7 percent, the lowest since October 2008, according to the Labor Department.

'Growth in economic activity picked up in recent quarters,' Fed officials said yesterday in a statement following their first policy meeting of the year. 'Labor market indicators were mixed but on balance showed further improvement. The unemployment rate declined but remains elevated.'

The Fed said it will trim its monthly bond buying by $10 billion to $65 billion.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Carlos Torres at ctorres2@bloomberg.net

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