U.S. economy hits soft patch in fourth quarter as inventories, trade weigh

Fri Jan 29, 2016 12:40pm EST
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By Lucia Mutikani

WASHINGTON (Reuters) - U.S. economic growth braked sharply in the fourth quarter as businesses stepped up efforts to reduce an inventory glut and a strong dollar and tepid global demand weighed on exports.

Gross domestic product increased at a 0.7 percent annual rate, the Commerce Department said on Friday in a report that showed a further cutback in investment by energy firms grappling with lower oil prices. Growth in consumer spending also slowed as unseasonably mild weather cut into spending on utilities.

But with the labor market strengthening and some of the impediments to growth largely temporary, economists expect output to pick up in the first quarter of 2016. First-quarter growth estimates are for now mostly above a 2 percent rate.

"The economy took its lumps late last year. It's not going to be smooth sailing in 2016, but we don't see the ship sinking either, and the rising concern about a recession later on this year triggered by China, those fears need a reality check," said Chris Rupkey, chief economist at MUFG Union Bank in New York.

The Federal Reserve on Wednesday acknowledged that growth "slowed late last year," but also noted that "labor market conditions improved further." The U.S. central bank raised interest rates in December for the first time since June 2006.

Though the Fed has not ruled out another hike in March, weaker growth and financial markets volatility could see that delayed until June. Excluding inventories and trade, the economy grew at a 1.6 percent pace in the fourth quarter.

The fourth-quarter growth pace was in line with economists' expectations and followed a 2 percent rate in the third quarter. The economy grew 2.4 percent in 2015 after a similar expansion in 2014.

The GDP data, together with a surprise decision by the Bank of Japan to cut a benchmark interest rate below zero in a bold move to stimulate the Japanese economy, buoyed the dollar against a basket of currencies. Prices for U.S. Treasuries rose and U.S. stocks were trading higher.   Continued...

The Lower Manhattan skyline, One World Trade Center and Manhattan Bridge are seen in the background as a ferry with a U.S. flag cruises along the East River while carrying passengers (not pictured) to the 2016 Volkswagen Passat reveal in New York September 21, 2015.    REUTERS/Darren Ornitz