GDP expanded at an annual rate of 2.6 percent in Q4 after soaring 5.0 percent in Q3, which had marked the fastest pace in 11 years. For all of 2014, the economy grew 2.4 percent, up from 2.2 percent in 2013 and in line with its 2.4 percent average annual performance during the five-year-old recovery that began in Q3 of 2009. Consumer spending, which accounts for more than two-thirds of GDP output, grew a healthy 4.3 percent in Q4, boosted by plunging gasoline prices and strong job growth. However, a stronger dollar created a drag on GDP growth in Q4 as exports slowed and imports increased sharply. Improvements in business activity have been widespread as industrial production has increased in 51 of the last 66 months to hover near a record high, the service sector has expanded for 60 straight months, and durable goods orders have increased year-over-year in 52 of the last 60 months. Conversely, the Small Business Optimism Index retreated from an eight year high (since October 2006), although it has risen in 11 of the last 15 months and nearly 4 points from a year ago. At 97.9, the Index was slightly below readings that have normally been associated with expansion and below its pre-recession average of 100 from 1973 through 2007.
According to the advance estimate, real gross domestic product or GDP (the output of goods and services produced within the U.S.) expanded at an annual rate of 2.6 percent in Q4 after increasing in the previous quarter by a robust 5.0 percent, which had marked the fastest pace in 11 years (since Q3 2003). GDP has rebounded solidly over the last three quarters following a Q1 contraction that was largely the result of some temporary headwinds, including the cold winter, weak exports, and reduced inventory-building. For all of 2014, the economy grew 2.4 percent, up from 2.2 percent in 2013 and in line with its 2.4 percent average annual performance during the five-year-old plus recovery that began in Q3 of 2009. In Q4, consumer spending, which accounts for more than two-thirds of the economy, grew a healthy 4.3 percent as plunging gasoline prices and strong job growth bolstered Americans' confidence. But government spending declined 7.5 percent as defense outlays tumbled after rising sharply in the third quarter. Business investment increased just 1.9 percent as companies girded for a strengthening dollar and sluggish overseas growth that's expected to dampen exports, and energy companies grappled with plummeting oil prices. Exports slowed as well, rising 2.8 percent, while imports increased sharply as the stronger dollar made foreign products less expensive for U.S. consumers. The widening trade gap subtracted from economic growth. Many economists expect the economy to grow a solid 3.0 percent in 2015. "With the collapse in energy prices increasing households' purchasing power, we expect strong consumption growth to continue driving GDP growth in the first half of this year," noted economist Paul Ashworth of Capital Economics.
Rising in 13 of the last 17 months, the Industrial Production Index ticked down from a record high in December, decreasing 0.1 point to 106.5 but was up 4.9 points from a year ago. Additionally, the Index has risen in 51 of the last 66 months since bottoming at 83.5 in June 2009.
New orders for manufactured durable goods fell sequentially for the fourth time in the last five months, decreasing 3.3 percent in December, after falling 2.2 percent the previous month. Nonetheless, new orders for manufactured durable goods were up 0.4 percent from a year ago and have advanced year-over-year in 52 of the last 60 months. Excluding the volatile transportation component (aircraft orders), durable goods orders decreased sequentially for just the sixth time in the last 16 months, declining 0.8 percent in December.
The service sector grew (exceeding 50 on the ISM Non-Manufacturing Index) for the 60th month in a row, with the pace of growth accelerating slightly from the previous month. In December, the Index edged up 0.2 points to register at 56.7 and was 2.7 points above its level of a year ago.
Up in 11 of the last 15 months, the Small Business Optimism Index retreated from an eight year high (highest since October 2006), declining 2.5 points in January to 97.9, but was 3.8 points above its level of a year ago. With the January decline, the Index fell slightly below readings that have normally accompanied an expansion and below its pre-recession average of 100 from 1973 through 2007. NFIB Chief Economist said, “November and December readings were very strong, possibly from post-election euphoria. January’s decline was mostly due to owners being less optimistic about business conditions, not spending and hiring plans. Regulation interference and taxes trump the list of concerns for small businesses while inflation risks and credit availability and costs are at the bottom. Only a net three percent of owners reported raising average selling prices. Even though there is a decline in optimism, the small business sector is operating in a somewhat normal zone. The increase in the percent of owners reporting hard to fill job openings is very good news.”