Download US Economy Hits Speed Bumps – WSJ 1-31-2015

U.S. Economy Hits Speed Bumps
Strength in Consumer Spending Is
Challenged by Weakness Abroad, Wary
Businesses By Josh Mitchell Updated Jan. 30, 2015 6:58 p.m. ET
The U.S. economy entered 2015 on the most robust
streak of consumer spending in years, yet when the first
growth figures for 2014 came out Friday they
underscored the lack of vigor in the current expansion.
Gross domestic product, the broadest measure of goods
and services produced across the U.S., notched an
annual growth rate of 2.4% for 2014, the government
said Friday, just a touch better than the sluggish average
of the nearly six-year-old recovery—and far from the 4%
growth of the late 1990s. Fourth-quarter GDP was 2.6%,
roughly half the summer’s blowout 5% pace, which was
aided in part by a spree of military purchases that wasn’t
repeated.
The report offered both hope and red flags for the
world’s largest economy. Households, boosted by a
surge in hiring and a slide in gasoline prices, went on
their biggest spending spree in almost nine years in the
fourth quarter amid signs of rising consumer confidence.
But U.S. companies suffered a dual blow. Imports rose
briskly as Americans bought foreign goods that were
effectively made cheaper by the strengthening dollar.
And the slumping world economy tamped down demand
for U.S. exports. That caused the trade gap to widen,
slicing a percentage point off economic growth.
Businesses also reined in capital spending, particularly
on equipment, after stepping up such outlays in the
spring and summer.
“Outside of consumer spending, it’s hard to argue for a
lot of momentum,” said Scott Hoyt of Moody’s Analytics.
But “if consumers do keep up their spending, as we add
jobs and wage income increases, that should lift a lot of
boats.”
Stock investors sent markets sharply lower after the
report. The Dow Jones Industrial Average dropped
251.90 points, or 1.4%, to 17164.95. The Standard &
Poor’s 500 fell 26.26 points, or 1.3%, to 1994.99. For the
month, the Dow lost 3.7% and the S&P 500 fell 3.1%.
The October-through-December period wrapped up
another year of halting progress for the recovery. The
year began bleakly, with a weather-driven 2.1% drop in
GDP, then took off through the spring and summer.
.
A sales assistant distributes shoes at Macy's during Black
Friday sales in New York. Gross domestic product—the
broadest measure of goods and services produced across the
economy—expanded at a 2.6% annual rate in the fourth
quarter
PHOTO: REUTERS
Now, gathering global turbulence presents another
obstacle that could prevent the U.S. economic
expansion from achieving higher sustained growth in the
near term.
But Federal Reserve officials, private-sector economists
and market analysts largely shook off the disappointing
fourth-quarter figures, pointing instead to the growing
appetite of U.S. households as a sign the recovery
remained firmly on track.
Scott Wren, senior equity strategist at Wells Fargo
Investment Institute, said he’s not concerned about a
global economic slowdown.
“We’re going to see better economic growth here and
stabilization abroad,” he said. Economic growth boosts
expectations for corporate earnings, a main driver of
stock prices. Mr. Wren said he expected moderate
earnings growth to help stocks gain this year, but not as
much as in recent years.
Some Fed officials also appeared unfazed, days after
the central bank gave an upbeat assessment of the
economy. “There is a lot of underlying momentum in the
U.S.,” St. Louis Fed President James Bullard said on
Bloomberg TV after the GDP report.
Many economists, while confident the U.S. will see
growth of about 3% this year, expect the current quarter
to stick to a similar pace as the last one as companies
draw down inventories. But a replenishment of
inventories should provide a boost to the U.S. economy
in the spring. Forecasting firm Macroeconomic Advisers
forecasts 2.4% growth in January through March;
Moody’s Analytics pegs it at 3.1%.
Separate reports Friday highlighted challenges ahead.
Consumer prices in the eurozone fell sharply in January,
raising the risk of deflation despite new stimulus efforts
from the European Central Bank.
And in the U.S., workers’ wages are still showing little
strength, renewing concerns that middle-class workers
are being left behind and that economic gains aren’t
being widely spread.
Wolfe’s Baldwin Brass Center in Malvern, Pa., is seeing
the unevenness of the recovery up close. The store,
near Philadelphia, sells decorative hardware such as
door locks and cabinet handles.
Sales have been “steady” of late, said owner Ann Marie
Gillinger, but most of the business is coming from highend customers—contractors building million-dollar-plus
homes. Business is stagnant among contractors that
work on middle-income homes.
“It’s the higher-end market that’s busy, but your regular
customers are still not in the buying mode,” Ms. Gillinger
said. “They’re not seeing the economy having gotten that
much better.”
Some companies are optimistic consumers will further
pick up spending in 2015, particularly as cheaper
gasoline prices save them billions. Visa Inc. said this
past week that three-quarters of its customers are using
lower spending at the pump to boost savings or reduce
debt.
Some retailers say the benefits of lower gasoline
prices—which have fallen more than 50% since June—
have yet to fully surface. Todd Teske, chief executive of
Briggs & Stratton Corp., a Wisconsin maker of engines
used in lawn mowers and other outdoor equipment, said
signs point to higher consumer spending in coming
months.
“The ultimate impact on retail spending and on sales of
lawn and garden equipment is yet to be seen,” Mr.
Teske said in a call with analysts this past week.
“However, we are encouraged that consumers have
more discretionary income this spring.”
He pointed to a recent pickup in new-home construction
as a sign the housing industry is poised to advance this
year as pent-up demand is unleashed, a development
that would stoke the broader economy.
For now, the construction industry remains weak, in part
because of subdued government spending. Overall
government outlays fell at a 2.2% pace last quarter,
reflecting a drop in defense spending. But state and local
governments have only modestly increased outlays.
That’s holding back companies like Manhattan Road &
Bridge Co., a highway contractor in Tulsa, Okla., that
rely on public-works projects. The firm recently won bids
to build two bridges on a local interstate, said Rich
Horrocks, vice president of the company’s operations in
Oklahoma and northwest Arkansas
Sales in recent weeks have been up roughly 10% from a
year ago, but competition is tight and the business is
choppy from month to month, he said. The 500-worker
company is holding off on hiring or investing in new
equipment.
The lack of a long-term federal highway-construction
bill—with Congress instead passing a series of shortterm funding extensions—has kept companies like his
on edge, Mr. Horrocks said.
“If we knew the highway program was going to be there
longer, the next few months we would probably do more
investing in equipment infrastructure of our own and
hiring more people,” Mr. Horrocks said. “We’re always
on the edge of that running out so we’re leery of making
any big investments.”