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U.S. Economic Growth Comes to a Near Halt

money-graph-rates [1]Much has been made of the economic improvements that led the Federal Reserve to raise the short-term interest rates for the first time in nearly a decade in December 2015.

However, economic growth nearly ground to a halt in the Bureau of Economic Analysis (BEA [2])“advance” estimate for the fourth quarter of 2015 [3], coming in at an annualized rate of 0.7 percent in the data released on Friday. This estimate follows GDP growth of 2.0 percent in the third quarter and 3.9 percent in the second quarter.

The Bureau emphasized that the advance estimate for Q4 is based on incomplete data and is subject to further revisions; the second estimate, based on more complete data, will be released on February 26, 2016.

According to the BEA, “The deceleration in real GDP in the fourth quarter primarily reflected a deceleration in PCE (personal consumption expenditures) and downturns in nonresidential fixed investment, in exports, and in state and local government spending that were partly offset by a smaller decrease in private inventory investment, a deceleration in imports, and an acceleration in federal government spending.”

The substantial slowdown in GDP growth in the Q4 advance estimate is not a cause for alarm or a sign of economic gloom and doom to come, according to Capital Economics.

“The slowdown in GDP growth to a very modest 0.7 percent annualized in the final quarter of last year is a temporary blip,” Capital Economics said in a statement. “With employment increasing by a monthly average of 284,000 during that quarter and final sales to domestic purchasers rising at a more acceptable 1.6 percent rate, we do not believe this is the start of a more serious downturn. GDP growth was 2.4 percent for 2015 as a whole and we anticipate a 2.5 percent gain in 2016.”

Despite the weak fourth quarter of 2015, things are looking up for 2016, according to Freddie Mac’s January 2016 Insights & Outlook [6] report released on Friday.

“Tracking data for fourth quarter 2015 growth has been negative and we’ve revised down our forecast for fullyear 2015 real GDP growth a tenth of a percentage point to 1.9 percent,” Freddie Mac said in the report. “The current expansion is the weakest in postwar history. According to our forecast, 2016 will mark the sixth full year of sub-3-percent economic growth. During prior postwar U.S. expansions economic growth averaged over 4 percent per year. The prospects for 2016 and 2017 are a little brighter, with real GDP growth projected to be 2.5 and 2.3 percent respectively, but still well below the postwar average.”