Con­sumers prop up US econ­omy, but prof­its un­der pres­sure

The Pak Banker - - 6BUSINESS -

NEW YORK: U.S. eco­nomic growth slowed in the fourth quar­ter, but not as sharply as pre­vi­ously es­ti­mated, with fairly strong con­sumer spend­ing off­set­ting the drag from ef­forts by busi­nesses to re­duce an in­ven­tory over­hang. Gross do­mes­tic prod­uct in­creased at a 1.4 per­cent an­nual rate in­stead of the pre­vi­ously re­ported 1.0 per­cent pace, the Com­merce Depart­ment said on Fri­day in its third GDP es­ti­mate.

Rel­a­tively strong con­sumer spend­ing un­der­scores the econ­omy's un­der­ly­ing strength and should fur­ther al­lay fears of a re­ces­sion, which trig­gered a mas­sive stock mar­ket sell-off early this year. That, to­gether with a tight­en­ing la­bor mar­ket and ris­ing in­fla­tion likely keeps the Fed­eral Re­serve on a path to grad­u­ally raise in­ter­est rates this year.

"The con­sumer is back in the driver's seat. There is no sign of re­ces­sion in these data so this will put a smile on Fed of­fi­cials' faces and ar­gues for their pol­icy of grad­ual in­ter­est rate nor­mal­iza­tion to con­tinue," said Chris Rup­key, chief econ­o­mist at MUFG Union Bank in New York.

GDP growth was ini­tially es­ti­mated to have risen at only a 0.7 per­cent rate. The econ­omy grew at a 2.0 per­cent pace in the third quar­ter and ex­panded 2.4 per­cent for all of 2015.

Con­sumer spend­ing, which ac­counts for more than two thirds of U.S. eco­nomic ac­tiv­ity, rose at a 2.4 per­cent pace and not the 2.0 per­cent rate re­ported last month. More con­sump­tion of ser­vices than pre­vi­ously es­ti­mated ac­counted for the re­vi­sion.

Spend­ing is be­ing sup­ported by ris­ing wages as the jobs mar­kets tight­ens, as well as firm­ing house prices. Gaso­line prices around $2 per gal­lon are also help­ing to un­der­pin house­hold dis­cre­tionary spend­ing. The dol­lar was trad­ing marginally higher against a bas­ket of cur­ren­cies. The U.S. stock and Trea­sury debt mar­kets were closed for Good Fri­day.

Fourth-quar­ter in­ven­tory in­vest­ment was re­vised lower. Still, in­ven­to­ries re­main high rel­a­tive to do­mes­tic de­mand.

Busi­nesses ac­cu­mu­lated $78.3 bil­lion worth of in­ven­tory rather than the $81.7 bil­lion re­ported last month. As a re­sult, in­ven­to­ries sub­tracted 0.22 per­cent­age point from GDP growth in­stead of the pre­vi­ously re­ported 0.14 per­cent­age point.

First-quar­ter GDP growth es­ti­mates are around a 1.5per­cent rate. But with the in­ven­tory pile still large and ship­ments of cap­i­tal goods or­dered by busi­nesses weak in Jan­uary and Fe­bru­ary, the risks to growth are tilted to the down­side. There was some bad news in the GDP re­port, with cor­po­rate prof­its fall­ing for a sec­ond straight quar­ter as a strong dol­lar and cheap oil un­der­cut the earn­ings of multi­na­tional and en­ergy com­pa­nies. Prof­its af­ter tax with in­ven­tory val­u­a­tion and cap­i­tal con­sump­tion ad­just­ments de­clined at an an­nual rate of 8.4 per­cent, the big­gest drop since the first quar­ter of 2014, af­ter fall­ing at a 1.7 per­cent pace in the third quar­ter.

For all of 2015 prof­its dropped 5.1 per­cent, the largest de­cline since 2008, af­ter slip­ping 0.6 per­cent in 2014. Prof­its from cur­rent pro­duc­tion fell $159.6 bil­lion af­ter de­creas­ing $33.0 bil­lion in the third quar­ter. Part of the drop was due to a $20.8 bil­lion trans­fer pay­ment re­lated to the BP (BP.L) oil spill in the Gulf of Mex­ico in 2010, which was the largest-ever U.S. off­shore oil spill. But even ac­count­ing for the oil spill set­tle­ment, which trans­lated to an $83.2 bil­lion rate of de­cline in prof­its, earn­ings were still weak. Prof­its from the rest of the world fell $6.5 bil­lion af­ter de­creas­ing $23.1 bil­lion in the third quar­ter.

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