WASHINGTON – The U.S. economy grew at a 2.4 per cent annual rate last quarter, sharply less than first thought, in part because consumers didn’t spend as much as initially estimated.
Severe winter weather is expected to further slow the economy in the current quarter. But as temperatures warm, most economists think growth will rebound beginning in the spring.
The Commerce Department on Friday reduced its estimate of economic growth in the October-December quarter from an initial 3.2 per cent annual rate. The revised estimate of 2.4 per cent annual growth is the weakest quarterly showing since the first quarter of 2013.
A key reason for the downgrade was that consumer spending is now estimated to have expanded at a 2.6 per cent annual rate, below the initial estimate of 3.3 per cent though still the strongest quarterly spending by consumers in nearly two years.
Economists said the more sluggish pace of consumer spending resulted from bad weather at the end of the year, which cut into vehicle sales, among other purchases. But they pointed to one key point of encouragement in the report: The government’s estimate of business investment was revised up to an annual rate of 7.3 per cent — the best quarterly showing in a year and sharply higher than the initial 3.8 per cent annual rate.
Jennifer Lee, senior economist at BMO Capital Markets, said that while she expects bad weather to limit this quarter’s growth to a tepid annual rate of around 1.7 per cent, she’s looking for a solid rebound for the rest of the year.
“Due to Mother Nature, quarter one is not going to be anything worth writing home about,” Lee wrote in a research note. “The rebound … and all of that pent-up demand won’t show up until the second quarter.”
In a separate report, the University of Michigan’s monthly index of consumer sentiment showed that while bad weather kept consumers away from retail outlets, it had not shaken confidence.
“Consumers have displayed remarkable resilience in the face of the polar vortex as well as higher utility bills and minimal employment gains,” said University of Michigan economist Richard Curtin.
Economists said steady consumer confidence supported their expectations for a rebound in spending once the weather improves.
The bad weather has squeezed retailers, forcing some stores to close. At one point in January, about 30 per cent of Macy’s and Bloomingdale’s stores were shut.
Home Depot Inc. estimated that it lost $100 million in January because of the bad weather. And home builder Toll Brothers Inc. said freezing, snowy weather in January and February had hurt its business in the Northeast, Mid-Atlantic and Midwest.
For all of 2013, the economy grew at a lacklustre 1.9 per cent. Analysts think growth will rebound in 2014, possibly to as high as a 3 per cent increase in the gross domestic product, the economy’s total output of goods and services.
Growth was held back last year by higher federal taxes and government spending cuts enacted to combat soaring budget deficits. Economists estimate that the squeeze from the government subtracted about 1.5 percentage points from growth last year. If growth does reach 3 per cent this year, it would be the strongest performance since the recession ended almost five years ago.
After enduring the deepest downturn since the Great Depression of the 1930s, the economy has struggled to gain momentum and the weak growth has made it harder for people who lost jobs during the downturn to find work.
The revisions in fourth-quarter growth were the result of updated data that the Commerce Department did not have when it made its first estimate a month ago. Commerce will make one further estimate of fourth-quarter GDP next month.
The biggest factor in the revised estimate of growth last quarter came from the reduction in consumer spending, which accounts for about 70 per cent of economic activity. The revision reduced purchases of durable goods such as autos, non-durable goods and services. Smaller downward revisions came from a reduction in the amount of stockpiles businesses built up, fewer exports, which increased the trade deficit, and weaker state and local government spending.
Government activity was a big drag in the fourth quarter, subtracting 1.1 percentage points from growth. The federal government accounted for 1 percentage point of the reduction, reflecting lower defence spending.
Spending on home construction, one of the economy’s standouts in 2013, fell in the fourth quarter. This setback is expected to be temporary and partly a result of the bad weather.
Federal Reserve Chair Janet Yellen said Thursday that the Fed still expects the economy to strengthen this year, which would help put more people to work. But she told the Senate Banking Committee that recent economic data have pointed to weaker-than-expected gains in consumer spending and job growth. She said the Fed will be watching to see whether the slowdown proves only a temporary blip caused by severe winter weather.
The Fed is gradually reducing its monthly bond purchases, which have been intended to keep long-term loan rates low to encourage spending and growth. It reduced its original $85 billion monthly pace in December and again in January in $10 billion steps to a current level of $65 billion.
Many economists think that as long as the economy keeps improving, the Fed will keep cutting the bond purchases by $10 billion at each meeting this year until ending the program in December.