The official estimate for economic growth during the last quarter of 2015 was revised slightly upward, and additional data released today suggests the first quarter may be healthier:
WASHINGTON — The U.S. economy got a double dose of good news Friday. Economic growth in the final three months of 2015 didn’t slow as much as previously estimated, and consumers roared back to life in January, spending at the fastest clip in eight months.
The Commerce Department said that consumer spending increased 0.5 percent last month, the best showing since May and far higher than the tiny 0.1 percent gain in December. Economists are expecting stronger consumer spending, which accounts for two-thirds of economic activity, to lift overall economic growth in the new year after a fourth-quarter slowdown.
In a separate report, the government said the gross domestic product, the broadest measure of economic health, grew at an annual rate of 1 percent in the fourth quarter. That’s an improvement from the first estimate of 0.7 percent, though just half the 2 percent growth posted in the third quarter.
The revision was made because the downturn in business stockpiling was less severe than the government’s first estimate. That helped offset slightly weaker consumer spending.
The Federal Reserve is closely watching economic data to determine how fast it needs to raise interest rates this year. The spending report showed that inflation, by a price measure preferred by the Fed, rose by 1.3 percent in the 12 months ending in January. That is nearly double the 0.7 percent 12-month gain seen in December but still below the Fed’s inflation target of 2 percent annual price increases.
Still, the inflation jump was sharp enough that it is sure to attract attention among Fed officials who are watching price increases for signals on how fast to raise interest rates. The Fed boosted a key rate by a quarter point in December, moving it from a record low near zero, where it had been for seven years.
After a stretch of economic turbulence at the beginning of the year, economists had trimmed their forecasts for 2016 rate hikes from four down to two. But if inflation accelerates more, that could encourage the Fed to move rates higher more quickly.
The latest GDP figure does little to change the fact that growth in the final months of 2015 was modest. Since then, global weakness and financial market turbulence have triggered worries about the potential fallout on the U.S. economy.
Still, economists are confident that GDP is poised to accelerate this quarter. Steady job gains and faster wage growth are boosting consumer spending, which accounts for more than two-thirds of the economy.
“First-quarter GDP growth is on track to rebound to a very healthy 2.5 percent (rate) which should dampen any concerns about an imminent recession,” said Paul Ashworth, chief U.S. economist at Capital Economics.
One factor that may help the state of the economy in the first three months of the year is the fact that, unlike both 2014 and 2015, the winter of 2016 has, so far at least, been relatively mild in the Midwest and Northeast, or at least far more mild than we saw in either of those two years when severe winter weather caused economic activity to grind to a halt to the extent that it actually turned negative in the first quarter of 2014 and barely grew in the first quarter of 2015. Nonetheless, the fact that the economy came out of 2015 in weak condition is somewhat concerning, especially since the final quarter of the year is typically one in which growth is stronger than at other points in the year due to increases in consumer spending associated with the holidays. Additionally, the fact that economic conditions elsewhere in the world continue to cause instability in financial markets. Even if that instability doesn’t lead to a recession here in the U.S., it has had a huge impact in several ways, including declining oil prices that have had a real impact on the energy sector of the economy.
As I’ve noted before, the importance of these statistics is now two-fold at this point. First of all, there’s the question of how all of this will impact Federal Reserve policy going forward and whether we’ll see additional interest rate increases this year. One percent economic growth in the final quarter of 2015 would seem to be an argument against raising rates even a small amount, but as noted above there are indications buried in the G.D.P. report that seem to suggest that inflation may be modestly increasing and that may cause the inflation hawks at the Fed to conclude that they need to continue raising rates to hold off a threat of inflation that doesn’t really seem to exist right now. Second, of course, is the fact that we’re in the opening stages of a Presidential election and that the state of the economy is likely to become a big issue going forward as it almost always is during such elections. If voters go into the voting booth in the fall feeling optimistic about the state of the economy, then this is likely to benefit the incumbent party even though President Obama isn’t on the ballot. If, on the other hand, voters feel uneasy about the state of the economy, or believe that the economy is not growing as strong as it needs to, which is essentially the root of the argument that most of the Republican candidates are making, then they may end up punishing the incumbent party holding the White House. Obviously, much of that will depend on statistics that won’t be released for months now but what is being released now will help to shape the narrative going forward.
