The US economy grew faster at the end of 2015 than originally believed thanks to more willing spending by consumers, the Commerce Department said Friday.
But a plunge in corporate sector profits, mainly due to the oil price crash, pointed to some key challenges for the world’s largest economy going forward this year.
The economy grew at a 1.4 percent pace in the October-December quarter, slower than the previous period but 0.4 percentage point better than the previous estimate.
Data showed that American consumers spent more in the period than originally estimated, with spending up 2.4 percent from the previous quarter, compared with the earlier 2.0 percent estimate.
The strong dollar’s hit on exports and slow growth elsewhere were also not as strong as thought, and homebuying was better as well.
But weak business investment in inventories held back gains, the main reason for the deceleration from the third quarter.
The slow quarter held growth for the full year to 2.4 percent, the same pace as 2014, despite early hopes for a pickup to 3.0 percent.
But even as household wealth grows on very strong new-job creation, ongoing struggles in Europe and Japan and the slowdown in China have limited how fast US activity can move.
“The final look at the 2015 GDP growth underlines the key dynamics of the economy: consumer spending and housing are keeping the economy going, despite major drags from net exports, capital spending and an inventory cycle,” said Nariman Behravesh, chief economist at IHS (NYSE: IHS – news) .
Jason Furman, chairman of the White House Council of Economic Advisors, also pointed to weaker foreign growth as the main drag, “underscoring the importance of policies that open our exports to new markets and promote strong domestic demand.”
But analysts said the sharp fall in company profits could also pose a challenge well into 2016. The Commerce Department data showed that US corporate profits plunged 11.5 percent in the fourth quarter from a year earlier, representing $ 245 billion less in earnings.
The key factor was the impact of low oil and gas prices on the energy industry, forcing huge cutbacks in spending, the layoffs of tens of thousands of workers, and driving numerous companies into bankruptcy.
For the year, corporate profits were down 3.1 percent, or $ 64 billion, from 2014.
That was the largest decline since 2008, Behravesh pointed out.
“Since oil prices have fallen more in the first quarter than the fourth quarter, this means that corporate profits will continue to be challenged through the early part of this year,” he said in a client note.
Most economists see US gross domestic product growth sticking to the fourth quarter pace during the current quarter and maybe picking up significantly only in the second half of this year as strong job creation numbers translate into better consumer spending.
“This revised composition of Q4 output, with healthier consumption and residential investment, supports our view that households remain the driver of US economic growth,” said Jesse Hurwitz at Barclays Research.
