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GDP Growth Stalls; What’s Next?

declining-pricesMuch has been made of the economic improvements that led the Federal Reserve to raise the short-term interest rates for the first time in nearly a decade in December 2015.

However, economic growth nearly ground to a halt in the Bureau of Economic Analysis (BEA) “advance” estimate for the fourth quarter of 2015, coming in at an annualized rate of 0.7 percent in the data released on Friday. This estimate follows GDP growth of 2.0 percent in the third quarter and 3.9 percent in the second quarter.

The Bureau emphasized that the advance estimate for Q4 is based on incomplete data and is subject to further revisions; the second estimate, based on more complete data, will be released on February 26, 2016.

According to the BEA, “The deceleration in real GDP in the fourth quarter primarily reflected a deceleration in PCE (personal consumption expenditures) and downturns in nonresidential fixed investment, in exports, and in state and local government spending that were partly offset by a smaller decrease in private inventory investment, a deceleration in imports, and an acceleration in federal government spending.”

The substantial slowdown in GDP growth in the Q4 advance estimate is not a cause for alarm or a sign of economic gloom and doom to come, according to Capital Economics.

“The slowdown in GDP growth to a very modest 0.7 percent annualized in the final quarter of last year is a temporary blip,” Capital Economics said in a statement. “With employment increasing by a monthly average of 284,000 during that quarter and final sales to domestic purchasers rising at a more acceptable 1.6 percent rate, we do not believe this is the start of a more serious downturn. GDP growth was 2.4 percent for 2015 as a whole and we anticipate a 2.5 percent gain in 2016.”

Despite the weak fourth quarter of 2015, things are looking up for 2016, according to Freddie Mac’s January 2016 Insights & Outlook report released on Friday.

“Tracking data for fourth quarter 2015 growth has been negative and we’ve revised down our forecast for fullyear 2015 real GDP growth a tenth of a percentage point to 1.9 percent,” Freddie Mac said in the report. “The current expansion is the weakest in postwar history. According to our forecast, 2016 will mark the sixth full year of sub-3-percent economic growth. During prior postwar U.S. expansions economic growth averaged over 4 percent per year. The prospects for 2016 and 2017 are a little brighter, with real GDP growth projected to be 2.5 and 2.3 percent respectively, but still well below the postwar average.”

The slow GDP growth in the first Q4 estimate is not a concern, according to Stewart Guaranty Chief Economist Ted Jones, because the jobs reports in the last few months have been so strong.

“The real impact on housing is jobs—employment,” Jones said. “U.S. job growth was 1.88 percent for the 12 months ending December 2015. In that 12 months, the U.S. created 2.65 million net new jobs.  So I am not concerned about the low GDP.”

According to Trulia Chief Economist Ralph McLaughlin, how much consumers are affected by the slower GDP growth depends on the market in which they live.

“Much of the slow growth in GDP was due to energy firms pulling back because of lower oil prices. So it is probably most likely to have an effect on oil-dependent markets such as Houston, Dallas, and the Dakotas,” McLaughlin said. “The flip side of lower oil prices is that consumers end up having more money in their pockets at the end of the day. While a temporary drop in oil prices doesn’t help consumers that much, a long-term sustained drop in oil prices will We’ve seen oil prices drop considerably in the last year and a half, which shows that it may be more of the new norm when it comes to gas or oil prices instead of a temporary blip. That’s actually good news for homebuilders and for existing homeowners because households are theoretically able to save more, and part of their savings may be devoted to a down payment on a home, or taking care of maintenance on their existing home.”

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.

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