With some recent negative headlines, including a moderation in China’s and Germany’s manufacturing activity, the geopolitical tensions in Eastern Europe, and a continuation in the Federal Reserve’s bond-buying tapering, investors welcomed an encouraging report this morning from the U.S. Government, which issued its final revision to its fourth-quarter 2013 GDP growth estimate at 8:30 A.M. (EDT).
Specifically, the U.S. Bureau of Economic Analysis, reported that the nation’s economy expanded by an annualized rate of 2.6% in the final quarter of 2013, which was revised upward from the last estimate in February. When combined with the 4.1% advance in the third quarter, it clearly shows that the U.S. economy is strengthening. More important, the report indicated that personal consumption expenditures (PCE) accelerated at an annualized rate of 3.3% in the fourth quarter, up from the 2.0% pace seen in the July-to-September period. In particular, spending on healthcare rose by its highest percentage in three years. The PCE increase is rather noteworthy, as the consumer accounts for about two-thirds of the nation’s economic output. With this in mind, it stands to reason that if the consumer is feeling better, the economy should continue to show improvement.
Taking a closer look at the component parts, the data revealed that many sectors of the economy contributed in a positive way to the fourth-quarter GDP growth. The increase in real gross domestic product reflected positive contributions from personal consumption expenditures, exports, and nonresidential fixed investment. This more than offset negative contributions from federal government spending and residential fixed investment, as well as an increase in imports, which subtracts from GDP. Furthermore, when factoring in that the partial government shutdown in October was a drag on the fourth-quarter performance, the advance is even more impressive.
All in all, the latest GDP data are another sign that the U.S. economy is clearly on the upswing. The sturdy increase in final demand should put the economy on a nice growth path in 2014. However, we do warn that an inventory correction, which was expected in the fourth quarter, but did not materialize, could, along with the severe winter weather during the first two months of this year, be a drag on growth in the first quarter of this year. (Note: The first estimate of first-quarter GDP is scheduled for release on April 30th.) Nevertheless, we still expect solid growth in 2014, especially if the consumer is feeling better, which looked to be the case during the final six months of 2013. In fact, the noted jump in consumer spending in the final period of 2013 was the strongest since the fourth quarter of 2010.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.