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Analyzing Why the US Economy Slowed down in 4Q14

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Growth revised down from advance estimate

The third estimate by the BEA (U.S. Bureau of Economic Analysis) showed that GDP (gross domestic product) growth for the US economy grew at a 2.2% pace in 4Q14 over the same period a year ago. The advance estimate was released in January. It placed the pace of US economic growth at 2.6%. The BEA releases three estimates of GDP growth. The third estimate is considered its most accurate estimate for the quarter.

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Why did growth slow?

According to the third estimate, the rise in imports weighed on the US economic growth rate. A fall in federal government spending and a slower-than-anticipated increase in business inventories were also responsible for the slow economic pace. However, an upward revision in consumer spending ensured that economic growth didn’t fall below 2.2%.

Federal government spending and investment fell 7.3% in the fourth quarter. Spending and investment grew by 9.9% in the third quarter. Government spending is generally volatile. Defense spending was down 12.2% in the quarter. It surged by 16% in the third quarter. State and local government spending and investment rose 1.6% in the quarter. It was revised down from a previously reported 2% rise. It rose by 1.1% in the third quarter.

Imports quicken

The major reason for the slow rise in GDP was the rise in imports while exports rose much slower. Rising imports reduce the GDP to that extent. In the fourth quarter, exports rose by 4.5%. This was higher than the 3.2% pace estimated in the second reading. However, imports surged by 10.4%. It was revised up from a 10.1% pace in the second estimate. Faster growing exports contributed to the GDP in the third quarter. They rose by 4.5%. Imports fell by 0.9%.

Economic growth is primarily affected by consumer spending. It affects the companies’ profits—like Home Depot (HD), McDonald’s (MCD), and Amazon.com (AMZN). It also affects the Consumer Discretionary Select Sector SPDR Fund (XLY). Broader market tracking ETFs—like 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 part of this series, we’ll look at business investment and consumer spending in more detail.

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