GDP Slows to 2.2% in Q4; Corporate Profits Fall

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In this March 13, 2015 photo, a worker prepares a chassis to receive an engine on a 2015 aluminum-alloy body Ford F-150 truck at the company's Kansas City Assembly Plant in Claycomo, Mo. The government issues its third and final estimate of how fast the U.S. economy grew in the October-December 2014 quarter on Friday, March 27, 2015. (AP Photo/Charlie Riedel)
Charlie Riedel/APWorkers on the Ford F-150 assembly line at its plant in Claycomo, Mo.
By Lucia Mutikani

WASHINGTON -- U.S. economic growth cooled in the fourth quarter as previously reported and after-tax corporate profits took a hit from a strong dollar, which could undermine future business spending.

Gross domestic product expanded at a 2.2 percent annual rate, the Commerce Department said Friday in its third estimate of GDP. That was unrevised from the forecast the government published last month.

Businesses throttled back on inventory and equipment investment, but robust consumer spending limited the slowdown in the pace of activity. The economy grew at a 5 percent rate in the third quarter.

%VIRTUAL-pullquote-Slower profit growth could mean slower investment in the coming months.%After-tax corporate profits declined at a 1.6 percent rate last quarter after increasing at a 4.7 percent pace in the third quarter. Corporate profits from outside the United States fell at an 8.8 percent rate, the steepest decline since the 2007-2009 recession.

"Slower profit growth could mean slower investment in the coming months," said Thomas Costerg, an economist at Standard Chartered in New York.

Multinationals such as technology giant IBM (IBM), semiconductor maker Intel (INTC), industrial conglomerate Honeywell (HON) and Procter & Gamble (PG), the world's largest household products maker, have warned that the dollar will hurt their profits this year.

The dollar gained 7.8 percent against the currencies of the main U.S. trading partners between June and December.

For all of 2014, after-tax corporate profits fell 8.3 percent, the largest annual drop since 2008.

Economists had expected fourth-quarter GDP growth would be revised up to a 2.4 percent rate and after-tax corporate profits would rise at a 1 percent pace.

U.S. stocks were trading marginally higher, as investors bet that the weak growth data would delay a Federal Reserve interest rate increase until later in 2015. The dollar dipped against a basket of currencies, while prices for U.S. Treasuries rose.

Dollar Headwind

A separate report showed consumer sentiment slipped in March, adding to signs that the moderate pace of economic expansion persisted through the first quarter.

The University of Michigan said its consumer sentiment index fell to 93 this month from a reading of 95.4 in February.

The sturdy dollar, lingering weakness in Europe and Asia, harsh winter weather in the United States and a now-settled labor dispute at busy U.S. West Coast ports dampened activity in the first two months of the year.

With temperatures rising, there are signs of some pick-up in activity. But the dollar will likely provide a challenge for domestic manufacturers. First-quarter growth estimates range between a 0.9 percent and 1.4 percent rate.

"The impact of dollar strength and energy price declines may prove too much for GDP to hit the long-awaited 3 percent threshold in 2015, leaving another year of mid-2 percent growth in its wake," said Jay Morelock, an economist at FTN Financial in New York.

Business Inventories

Businesses accumulated $80 billion worth of inventory in the fourth quarter, less than the $88.4 billion the government had estimated last month.

As a result, inventories subtracted 0.10 percentage point from GDP growth in the fourth quarter. Restocking was previously reported to have added 0.1 percentage point to output.

The weak pace of restocking, however, removes the threat of an inventory overhang, giving businesses scope to place more orders for goods, which should help to stimulate manufacturing.

Business investment on equipment was revised to show it rising at a 0.6 percent rate instead of the previously reported 0.9 percent pace, likely reflecting the impact of the strong dollar and lower crude oil prices, which have caused a drop in drilling and exploration activity.

But consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 4.4 percent rate in the fourth quarter instead of the 4.2 percent rate reported last month. It was the fastest pace since the first quarter of 2006.

Consumer spending, however, moderated early in the first quarter as cold and snowy weather kept shoppers at home. Households also appear to have opted to save the bulk of their savings from lower gasoline prices.

Despite slower global demand, export growth was revised higher. But with consumer spending so strong, more imports than previously estimated flowed into the country, resulting in a trade deficit that weighed on GDP growth.

Trade lopped off 1.03 percentage points instead of the 1.15 points reported last month.

-With additional reporting by Richard Leong in New York.

10 PHOTOS
9 Numbers That'll Tell You How the Economy's Really Doing
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GDP Slows to 2.2% in Q4; Corporate Profits Fall
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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