US growth is picking up as consumers are finally spending more

Washington: The US economy grew at a 2.6 percent annual rate in the October-December quarter, slightly more than previously estimated, as consumer spending rose at the fastest pace in three years.

The fourth-quarter growth rate was a bit stronger than the 2.4 percent estimate made last month, the Commerce Department reported Thursday. The revision reflected stronger consumer spending, which rose at an annual rate of 3.3 percent - its best quarterly pace since 2010.

Even with the upward revision, growth in the overall economy slowed from a 4.1 percent pace in the July-September quarter. Analysts think growth has slowed even more in the current January-March period to around a 2 percent annual rate. A harsh winter has disrupted factory production and kept people away from shopping malls.

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[caption id=“attachment_79059” align=“alignleft” width=“380”]  Representational Image. Reuters[/caption]

But once warmer weather appears, analysts are looking for a rebound in economic activity with consumer spending expected to be helped by pent-up demand from purchases that were deferred during the bad weather.

Analysts viewed the upward revision to fourth quarter growth as an encouraging sign showing that the economy had more momentum going into the first quarter than previously believed.

Sal Guatieri, senior economist at BMO Capital Markets, forecast that first quarter growth would slow to around 1.7 percent because of the winter disruptions but he said growth will likely rebound to around 3 percent in the April-June period.

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Many economists are forecasting that growth for the entire year will hit 3 percent. If that forecast proves accurate, it would make growth this year the strongest since 2005, two years before the nation plunged into the worst recession since the 1930s.

Since the recession ended in June 2009, the economy has struggled to gain momentum and the weak growth has made it harder for people who lost jobs during the downturn to find work.

The report Thursday on overall economic growth as measured by the gross domestic product was the government’s third and final look at the fourth quarter GDP.

For all of 2013, the economy grew at a lackluster 1.9 percent after growth of 2.8 percent in 2012. Growth was held back last year by higher federal taxes and government spending cuts enacted to combat soaring budget deficits. Economists estimate that the squeeze from the government subtracted about 1.5 percentage points from growth.

The upward revision in activity in the fourth quarter came in part from additional spending in such areas as health care. Spending on services increased by the most since the spring of 2005.

Business investments on structures and equipment grew at a 5.7 percent annual rate, slower than previously estimated but still up from a 4.8 percent increase in the third quarter.

The drag from cutbacks in government activity continued with government spending falling at a 5.2 percent rate in the fourth quarter, reflecting reductions in defense and non-defense spending at the federal level. Spending by state and local governments was unchanged, an improvement from a previous estimate which showed state and local spending still falling.

Federal Reserve Chair Janet Yellen said after a Fed meeting last week that the central bank still expects the economy to strengthen this year, which would help put more people to work.

At that meeting, the Fed decided to reduce its monthly bond purchases by another $10 billion, the third such reduction since December. That puts the bond purchases, which are intended to keep long-term loan rates low to encourage spending and growth, at $55 billion.

Many economists think that as long as the economy keeps improving, the Fed will keep cutting the bond purchases by $10 billion at each meeting this year until ending the program entirely in December.

Associated Press