The American economy grew just 0.7 percent in the last quarter of 2015, stroking fears of a downturn on top of the tumultuous activity to open the year.
The Commerce Department’s report on economic activity bested the predictions from some economists who believed the economy might have contracted in last year’s fourth quarter, but others had anticipated at the new year of growth reaching at least twice the pace. However, mounting data has shown weak business reports, large warehouse inventories, and lower-than-expected consumer activity during the holiday season.
The stagnate data barely registered in the markets for the first few weeks of the year, however, as reports on a weakened Chinese economy, plummeting oil prices and a wilting euro prompted a free fall in the American markets. Today’s report, coupled with indications of a slowing in the Federal Reserve’s plan to hike interest rates throughout the year, has given the markets a small pump, as the Dow is currently up 253 points, or 1.58 percent. The S&P and NASDAQ indeces are also up in similar numbers.
The economic slowdown was a result of slower sales in durable goods, weaker trade and uncertain inventories. The service industry, a solely domestic source of economic activity, helped keep the economy in the black, signs that the international economy continues to weaken while the U.S. economy holds on.
With just .7 percent growth, 2015 ends up at 2.4 percent for the overall economy, the same pace as 2014 and higher than the 1.5 percent increase in 2013. However, concerns are still high for a possible reduction in the coming months. If two or more quarters show shrinking economic activity, the United States will officially be in a recession. The previous recession, commonly called the Great Recession, ran from December 2007 through June 2009, though some factors — primarily wages — have yet to recover.
Recessions in modern history have been separated by larger periods of economic growth with short windows of recession. More than six years separated the dot-com recession and the Great Recession while a record 10 years of growth created a chasm between the dot-com in 2001 and the oil price shock of 1990. Contraction has been smaller, too, with just over 4 percent of GDP shrank during the Great Recession compared to the 26.7 percent collapse during the Great Depression in the 1930s.
But not all signs are pointing to a recession at the moment. Despite the stock market drop and the gloomy GDP report, unemployment still stands at 5 percent and looks to continue to fall. Employers during the lackluster quarter added an average of around 300,000 jobs in each of the three months. The real estate market continues to hold up to external pressures and the Fed still started its long process of raising interest rates above 1 percent.
Wednesday’s meeting did not include another increase by the Fed, but the statement coming out of the congregation indicated members would look at an increase in March’s meeting.
One factor in the slowdown last quarter was through inventories. Because so many goods were stored in warehouses and retail shelved during the second and third quarters, some slowdown was expected in the area for the fourth, according to Mariman Behravesh, the chief economist for research and consulting firm IHS.
“That affects top-line growth but doesn’t really say so much about the fundamentals of the U.S. economy,” he said. Behravesh is in the optimist camp, predicting around 2.5 percent growth for the first half of the year paired with falling unemployment rates and life sprouting in wage increases. He said he believes unemployment could drop to 4.5 percent, which would flip the market into a job-seeker market from an employer’s market.
The lack of growth after the Great Recession has established a long cycle of conservative action from larger businesses, however. Instead of investing in new fields or for expansion, many industries have seen consolidation of companies (i.e., buyouts and mergers). Profits have not been negatively impacted, though, and the dollar continues to remain strong. That’s good news for foreign investment but bad news for local manufacturing companies that depend on international sales.
Another problem with non-service and technological sectors of the economy lies in the price of oil. As reserve swell throughout the world and demand drops, oil has seen a near collapse, losing more than half its value from the peak of 2015. The price of crude dropped below $30 for the first time in years earlier in January, and currently rests around $34. This has been good for consumers, where some pump prices have dropped near $1 in smaller markets.
On the other side, though, it has been miserable for the Midwest, where energy companies have slashed jobs to try and keep up with the price drop. Oklahoma, which relies heavily on oil and gas investments, saw itself transform from one of the nation’s fastest-growing economies to one of the worst performers because of the cheap oil.