U.S. economic growth slowed in the fourth quarter but not as sharply as previously estimated, with fairly strong consumer spending offsetting the drag from efforts by businesses to reduce an inventory overhang.
Gross domestic product increased at a 1.4 percent annual rate instead of the previously reported 1 percent, the Commerce Department said Friday in its third GDP estimate.
Relatively strong consumer spending underscores the economy’s underlying strength and should further allay fears of a recession — concerns that triggered a massive stock-market sell-off early this year. Together with a tightening labor market and rising inflation, that probably keeps the Federal Reserve on a path to gradually raise interest rates this year.
“The consumer is back in the driver’s seat. There is no sign of recession in these data, so this will put a smile on Fed officials’ faces and argues for their policy of gradual interest-rate normalization to continue,” said Chris Rupkey, chief economist at MUFG Union Bank in New York.
The economy grew at a 2 percent pace in the third quarter and expanded by 2.4 percent for all of 2015. Consumer spending, which accounts for more than two thirds of U.S. economic activity, rose at a 2.4 percent pace and not the 2 percent reported last month.
Spending is being supported by rising wages as the job market tightens as well as by firming house prices. Gasoline prices around $2 per gallon are also helping to underpin household discretionary spending.
The U.S. stock and Treasury debt markets were closed for Good Friday.
There was some bad news in the GDP report, with corporate profits falling for a second straight quarter as a strong dollar and cheap oil undercut the earnings of multinational and energy companies.
Profits after tax with inventory valuation and capital consumption adjustments declined at an annual rate of 8.4 percent, the biggest drop since the first quarter of 2014, after falling by 1.7 percent in the third quarter.
Profits dropped by 5.1 percent for all of 2015, the largest decline since 2008, compared to a slip of 0.6 percent in 2014.
Part of the drop was due to a $20.8 billion transfer payment related to the BP oil spill in the Gulf of Mexico in 2010, the largest-ever U.S. offshore oil spill.
But even accounting for the settlement, earnings were weak.
“This poor performance reflects energy firms struggling with lower oil prices and manufacturing firms hit by the strong dollar,” said Jesse Edgerton, an economist at JPMorgan Chase in New York. “But it also likely reflects the beginnings of a profit-margin squeeze driven by tighter labor markets, rising wages and weak productivity growth.”
The dollar gained 10.5 percent last year versus the currencies of the United States’ main trading partners, putting a squeeze on the profits of multinational companies such as Procter & Gamble and Colgate-Palmolive.