January 30, 2015
A weak trade performance and a sharp reversal in military spending held GDP growth to 2.6 percent in the fourth quarter. This brought the full year growth (Q4 to Q4) to 2.5 percent, only slightly above the growth rate of the prior three years. The growth rate of final demand in the fourth quarter was even weaker at 1.6 percent, as inventory accumulations added 0.82 percentage points to growth.
The slowdown in the fourth quarter was predictable as third quarter growth was driven by 16.0 percent jump in military spending. These numbers are highly erratic and sharp swings are usually reversed, as was the case in this quarter. Military spending declined at a 12.5 percent annual rate subtracting 0.58 percentage points from growth in the quarter.
Trade was also a big subtraction from growth, as imports grew much more rapidly than exports. After adding 0.76 percentage points to growth in the third quarter, net exports subtracted 1.02 percentage points from growth in the fourth quarter. Trade is likely to be an ongoing drag to growth in future quarters as the higher dollar makes U.S. goods and services less competitive and austerity policies in Europe continue to depress growth in a major trading partner.
Investment spending was also weak in the quarter. Non-residential investment rose at just a 1.9 percent annual rate with equipment investment actually shrinking at a 1.9 percent annual rate.
On the whole, this report suggests that the economy will continue on a modest growth path that is not qualitatively different from prior years in the recovery. The relatively weak 4th quarter numbers may be a surprise to fashion driven economists, but it was predictable given the composition
of growth in prior quarters.
