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Markets taken aback by fourth quarter slowdown in US economy

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Slower than expected

The advance estimate by the U.S. Bureau of Economic Analysis (or BEA) showed that gross domestic product (or GDP) growth for the US economy slowed to a 2.6% pace in the fourth quarter over the same period a year ago. This was a sharp slowdown from the stellar 5% rise reported in the final estimate for the third quarter. The BEA releases three estimates of GDP growth, and the third is considered its most accurate estimate for the quarter.

Markets and economists alike were taken aback by the weaker-than-expected reading for the US economy. Since this was the first estimate, they’re hoping this rate will be revised as more data come in.

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Why did growth slow down?

Federal government spending and investment dragged down the GDP. It fell 7.5% in the fourth quarter after growing by 9.9% in the third. Government spending is generally volatile. Defense spending was down 12.5% in the quarter after surging by 16% in the third quarter. Even though state and local government spending and investment rose 1.3% in the quarter after rising 1.1% in the third quarter, it was too little to cover the fall in spending by the federal government.

Another reason for the slow rise in GDP was the rise in imports while exports rose much more slowly. Rising imports reduce the GDP. In the fourth quarter, while exports rose by 2.8%, imports surged by 8.9%. Faster growing exports contributed to the GDP in the third quarter when exports rose 4.5% and imports fell 0.9%.

Economic growth is primarily affected by consumer spending, which affects the profits of companies such as Home Depot (HD), McDonald’s (MCD), and Amazon.com (AMZN). These companies consequently affect the Consumer Discretionary Select Sector SPDR Fund (XLY). Broader market tracking ETFs such as the SPDR S&P 500 ETF (SPY) and the iShares Core S&P 500 ETF (IVV) also react strongly to the GDP report.

In the next article, we’ll look at how other components of GDP fared, including consumer spending. We’ll also look at the state of economic growth in 2014.

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