Consumer spending grew last year by the most since 2005, in spite of a slight slackening in the fourth quarter. Nonresidential business investment, meanwhile, rose at its slowest pace since 2010 as oil and gas companies sharply curtailed spending.
The key theme for the economy “is the stark contrast between the fortunes of the household and business sectors,” and how that plays out going forward, said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC in New York, Bloomberg reported.
Will the strength in consumer outlays encourage companies to step up spending and keep on hiring? Or will businesses, battered by slow global growth and a rising dollar, turn more risk averse and start to prune payrolls, undermining household spending in the process?
For now, most economists are betting that the American consumer will come out on top and the economy will avoid a recession. Some though are trimming their 2016 growth forecasts as slumping stock and corporate-bond markets make companies even less willing to expand.
“We still have a fairly solid picture in terms of domestic demand, which is mostly consumer spending, housing, and fixed investment that’s not related to energy, which is doing OK,” said Nariman Behravesh, chief economist at IHS Inc. in Lexington, Massachusetts. “Those are the sources of strength in the US and that’s close to 90% of the US economy.”
GDP Climbs
Federal Reserve Bank of Dallas President Robert Kaplan also said an economic slump over the next year was “unlikely.” The strength of the consumer and the deleveraging of household balance sheets gave him “confidence” that the economy won’t slow enough to slip into a recession, he said Friday in an interview at Bloomberg headquarters in New York.
Gross domestic product climbed 2.4% last year, matching the performance of 2014. The complexion of growth though changed, with consumer spending advancing 3.1%, while business outlays on structures such as factories, oil rigs and shopping centers dropped 1.5%.
That same dichotomy was evident in the fourth quarter, as personal consumption expenditures rose while business investment in equipment and structures dropped for the first time since the third quarter of 2012. GDP increased 0.7% after a 2% advance in the third quarter.
Foreign Markets
American companies, meanwhile, continue to face challenges posed by the strengthening dollar, which both makes their goods more expensive to sell to foreign customers while imported products become cheaper for US consumers. That’s been exacerbated by concerns that global growth is slowing, led by emerging-market economies such as China.
A plunge in oil markets has caused energy companies to slash investment. For all of last year, outlays for structures used in mining and to extract oil and gas plunged 35%, the most since 1986.
The next key reading in the tug of war between corporate caution and consumer confidence comes on Feb. 5 with the release of the monthly jobs figures. Payrolls are projected to have risen by 190,000 this month after an outsized 292,000 increase in December.
“Job growth is going to slow. The 290,000 and plus that we got in December is not sustainable, particularly given the issues that businesses are facing,” said Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania.
Still, talk that the US is headed into recession seems misguided, he said. “The US economy ended 2015 with a thud, but it is premature to panic.”
