The US economy expanded by more than initially estimated in the final three months of 2015 as inventories rose by more than first reported. GDP grew at an annualized rate of 1% in the fourth quarter, up from initial estimates of 0.7% and above consensus forecasts of a 0.4% expansion. However, this still represents a slowdown from the 2.0% rate seen in the previous quarter.
The main changes in the second estimate that drove the upward revision were higher inventories, which deducted 0.14% from GDP growth instead of the 0.45% deduction in the preliminary estimate. The inventory build-up is not entirely a positive development though as it’s usually seen to be dragging on future growth since businesses reduce their stockpiles first before raising production from new orders.
Also weighing on growth were net exports, which deducted 0.25% from the growth rate. However, this was smaller than the 0.47% drag in the first estimate. Exports declined by 2.7% in the fourth quarter after growing 0.7% in the previous quarter. Imports also fell, but by a much smaller amount of 0.6%.
Personal consumption was unexpectedly revised down though, from 2.2% to 2.0%. The figure marks a slowdown from the 3% rate in the third quarter. Personal consumption is the largest component of US GDP and a deterioration in consumer spending would be worrisome for the world’s largest economy. However, this is already proving as just a temporary moderation in personal spending as figures published soon after the GDP revisions show that personal consumption grew at healthy pace in January.
Personal consumption expenditure rose 0.5% month-on-month in January after being flat in December. It beat expectations of a 0.3% gain. Personal income also accelerated, growing by 0.5% in January. The figure was above estimates of 0.4% and higher than the 0.3% rate in the prior month.
In a further sign that the US economic recovery remains on track, the personal consumption expenditure (PCE) price index, a closely watched inflation gauge by the Fed, moved closer to the Fed’s 2% objective. The PCE price index jumped from an upwardly revised 0.7% in December to 1.3% year-on-year in January. More significantly for the Fed, the core PCE price index, rose to 1.7% – the highest level since July 2014.
The dollar surged after the GDP data and the rally was fuelled further from the personal consumption figures as they show that the US economy is unlikely to suffer a significant setback from the current headwinds facing the global economy. The high volatility seen in world financial markets has partly been attributed to investors’ scepticism over the Fed’s optimistic outlook of the US economy and in turn, for its rate path projections. Today’s data underscores the view that the fundamentals of the US economy remain strong and the Fed is likely to proceed with further rate hikes this year. It would also prompt some analysts to reconsider their expectations that the Fed won’t raise rates at all this year.
The greenback climbed to a day’s high of 113.78 yen after the data from around 113 yen prior to the release but later eased back to 113.65 yen. The euro was less resilient than the yen though as it plummeted to a 3-week low of 1.0942 dollars before steadying around 1.0955 dollars. Meanwhile, cable pulled back towards the 7-year lows seen two days ago as it lost the 1.39 handle. The pound was last trading at 1.3887 dollars in late European session.
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