Question

Read this article and write a 2-3 page summary of what you learned on GDP

US economic growth slowed to 0.7% in 4Q of 2015

WASHINGTON >> The U.S. economy’s growth slowed sharply in the final three months of 2015 to a 0.7 percent annual rate. Consumers reduced spending, businesses cut back on investment and global problems trimmed exports.

The slowdown could renew doubts about the durability of the 6½-year-old economic expansion, though most economists expect growth to rebound in the current January-March quarter.

The government’s estimate Friday of the economy’s expansion in the October-December period was less than half the 2 percent annual growth rate in gross domestic product in the third quarter of 2015. It was the weakest showing since a severe winter reduced growth to a 0.6 percent annual rate in last year’s first quarter.

Paul Ashworth, chief U.S. economist at Capital Economics, called the disappointing fourth quarter performance a “temporary blip” and not “the start of a more serious downturn.”

He said that GDP growth should rebound to a rate between 2.5 percent and 3 percent in the first half of this year as consumer spending picks up in response to further solid gains in job growth. For the year, Ashworth said he was forecasting growth of 2.5 percent.

Much of the weakness last quarter reflected a slowdown in consumer spending, which grew at an annual rate of just 2.2 percent, compared with a 3 percent rate in the previous quarter. Spending on both durable goods, such as cars, and nondurable goods, such as clothing, slowed.

Consumer spending accounts for about two-thirds of economic activity, and analysts are counting on the strong employment growth to fuel a rebound in the current quarter. Some, however, worry that China’s economic troubles and sinking oil and stock prices could continue to dampen the U.S. expansion.

Friday’s estimate of fourth-quarter growth was the first of three that the government will issue.

Besides consumer spending, another source of weakness last quarter was a drop in exports. It reflected in part a stronger dollar, which has made U.S. goods pricier and therefore less competitive on overseas markets. Persistent weakness in such key export markets as China and Europe hurt, too. A wider U.S. trade deficit cut annual growth for the quarter by 0.5 percentage point.

Another drag came from cutbacks in business investment spending, which fell at a 1.8 percent annual rate, with spending on structures down 5.3 percent. That reflected a 38.7 percent plunge in spending in the oil and gas industry, which has slashed drilling and exploration in response to the plunge in oil prices.

In addition to their reduction in investment, businesses cut spending on stockpiles to try to pare unwanted inventories. That effort trimmed growth by 0.5 percentage point in the fourth quarter.

Home construction grew at a solid 8.1 percent annual rate. Government spending slowed to a growth rate of just 0.7 percent. Spending by the federal government grew by a 2.7 percent annual rate, while state and local governments cut back on spending at a rate of 0.6 percent.

For all of 2015, the economy grew 2.4 percent, matching the growth in 2014. Both years improved on a 1.5 percent increase in 2013. The 2015 growth continues the economy’s pattern of subpar growth since the Great Recession officially ended in June 2009.

For 2016, economists have forecast another year of modest growth of around 2 percent. At the same time, they have nudged up the likelihood of a recession this year. While still low, the likelihood is now put at around 20 percent, though most analysts still see an outright recession as unlikely.

This week, the Federal Reserve issued a cautious assessment of the economy. The Fed left interest rates unchanged after having raised its benchmark short-term rate in December from record lows. Many analysts think that economic weakness, subpar inflation and global pressures will cause the Fed to slow its pace of rate hikes this year from what had been expected to be four increases to perhaps only two.

Economists expect strength in the domestic economy this year to offset weakness in export sales and in the U.S. energy sector.

While economic growth was lackluster last year, hiring was not. The economy added an average of 284,000 jobs a month in the final quarter of last year. The unemployment rate ended the year at a low 5 percent.

Mark Zandi, chief economist at Moody’s Analytics, has said he expects strong job growth to keep lowering unemployment and to help boost wages, which have lagged in this recovery. He said the extra consumer spending, which will be aided by lower gas prices, will likely support economic growth of around 2.5 percent in 2015.

Growth at that level is above the economy’s potential right now, which many analysts put at around 2 percent, reflecting a slower pace of people entering the job market and slower productivity growth.

Answer 1

The U.S. economy’s growth reduced in the fourth quarter of 2015 to 0.7 percent annual rate as consumers decreased their spending, businesses reduced their investment and problems outside the U.S. decreased exports of U.S. The US Economic Growth rate was the weakest showing in the third quarter of 2015 since a harsh winter reduced growth to a 0.6 percent annual rate. Consumer spending on both durable goods, such as cars, and nondurable goods, such as clothing, slowed down compared to the previous quarter.

Besides consumer spending, another source of weakness last quarter was a decrease in exports. We can understand this because the dollar was stronger than currencies of other countries which in turn made U.S. goods more expensive compared to other countries and so it couldn't compete well with other currencies globally which in turn increased U.S. trade deficit because imports increased more than exports.

Decrease in business investment spending, was another reason for the slowdown. Spending in the oil and gas industry decreased because the oil price reduced drastically globally. Businesses cut spending on stockpiles so that they didn't have unwanted inventories.

The chief U.S. economist at Capital Economics, Paul Ashworth, said that the slowdown in economic growth was just temporary and it would revive when there would be further increase in jobs. Even though the economic growth was not good still the unemployment rate was low in the fourth quarter of 2015. Mark Zandi, chief economist at Moody’s Analytics also said that increase in job growth would increase wages and help in the recovery process.