Weak 4Q GDP: Temporary Dip or Is U.S. Recession Bound?

The U.S. economy slowed down in the fourth quarter, pressured by an array of global factors including weakening demand in emerging markets and a strong dollar that makes U.S. exports more expensive.

As demand eased overseas late last year, U.S. companies sought to slash bloated inventories, another factor that caused fourth-quarter GDP to fall to 0.7% growth, in line with analysts’ expectations for a 0.8% gain, but down from a 2% growth rate in the third quarter.

The economy grew 2.4% overall in 2015, the same as in 2014. Excluding inventories and trade, the economy grew at a 1.6% pace in the fourth quarter, the Commerce Department reported on Friday.

The weak first reading of fourth quarter growth heightens concerns that the U.S. economic recovery is once again waning.

“U.S. economic growth slowed sharply in the final quarter of last year, according to the first official estimate. At least some of the weakness looks temporary, but there are also signs that the underlying pace of expansion is on the wane,” said Chris Williamson, chief economist at research firm Markit.

Of notable concern was a dropoff in consumer spending growth to 2.2% in the fourth quarter, down from 3% in the prior quarter. Analysts had hoped the dramatic decline in oil prices in the latter half of 2015 would put more money in consumers’ pockets, allowing them to spend more freely on consumer goods. Consumer spending, after all, represents nearly 70% of overall GDP.

That didn’t happen, however. Consumers may be pocketing more money as the price of gasoline at U.S. pumps has fallen below $2 a gallon in most regions, but they didn’t run out and spend it at the mall in the fourth quarter.

Williamson said some of the spending decline could be attributed to “subdued winter clothing sales resulting from the unseasonably mild weather, but the drop in growth of consumer spending will no doubt sustain fears that the U.S. economy is reaping few benefits from the oil price rout while paying the cost as oil sector revenues plunge.”

The same factors that held back U.S. economic growth have also roiled stock markets, pushing all three major U.S. indexes in correction territory in recent sessions. Although markets staged a bit of a comeback this week. Despite the weak GDP number, the Dow Jones Industrial average was up more than 200 points at 11 a.m. EST and was poised to show a gain for the week.

Analysts fear the turmoil overseas combined with stock market volatility could prompt already-skittish consumers to become even more reluctant to spend their money.

All these factors will undoubtedly weigh on the Federal Reserve as central bank policy-makers mull the trajectory of interest rates moving forward in 2016. The Fed, after voting to raise rates in December for the first time in nearly a decade, painted a fairly rosy picture of 2016 and suggested they would raise rates four more times in the upcoming year.

On Wednesday, the U.S. central bank left interest rates alone and conceded that the economy has slowed, but offered no timetable for raising rates.

“The slowdown adds more pressure to the Fed to reconsider the timing of future rate hikes, and suggests that policymakers may pare back their current expectations of a further four quarter-point hikes in 2016,” said Williamson.

Meanwhile, some analysts believe the decline in growth is temporary and healthier expansion will return in the second quarter fueled by a strong labor market and (presumably) rising energy prices.

“The weak growth in real GDP is temporary,” said Nariman Behravesh chief economist at HIS Global Insight. “While the weaker fourth quarter growth in consumer spending is something to keep an eye on, IHS Global Insight expects that growth will rebound to at least 3.0% in the second half. Both employment growth and income growth are robust. Moreover, the sharp deceleration in nondurable spending is likely temporary.”