A potent mix of rising exports, consumer spending and business investment helped the U.S. economy end the year on solid footing.
Gross domestic product, the broadest measure of goods and services churned out by the economy, grew at a seasonally adjusted annual rate of 3.2% in the fourth quarter, the Commerce Department said. That was less than the third quarter’s 4.1% pace, but overall the final six months of the year delivered the strongest second half since 2003, when the economy was thriving.
There has been a pattern of the economy perking up for a time only to stumble again amid a new crisis, and that could happen again. One potential risk: the reverberations from a currency crisis in emerging markets. Disappointing numbers on jobs and housing also have raised concerns about whether the economy is accelerating. More than four years after the end of the recession, America’s rebound remains weak compared with past recoveries.
But many economists see the U.S. economy moving into a higher gear. Federal Reserve officials, in further pulling back on a bond-buying program meant to spur growth, noted this week that the economy has shown “growing underlying strength.” Consumer confidence is rising, and manufacturers are getting busier to meet increased demand.
A big driver of growth in the fourth quarter was a rise in consumer spending, which grew 3.3%, the fastest pace in three years. Consumer spending accounts for roughly two-thirds of economic activity.
Mike Kobayashi, the general manager of Artisan, an 80-seat restaurant in a resort area north of Santa Barbara, Calif., says his patrons seem to be more optimistic. His restaurant’s revenue rose between 10% to 15% in the fourth quarter compared with the same period the year before.
“People are feeling positive,” Kobayashi said. “Hotels here on the weekends are just booked.”
Despite fears that spending would come in weak during the holiday season, U.S. companies from Wal-Mart Stores to J&J Snack Foods to manufacturer Leggett & Platt are noting that consumers have been resilient, leading to a brighter outlook. Indeed, spending on hotels and restaurants jumped more than 10%, the biggest quarterly percentage rise in over 20 years–suggesting better job growth and rising home and stock-market values are giving some Americans more cash to spend.
“I never cease to be amazed at the American consumer,” Bill Simon, chief executive of Wal-Mart’s U.S. business, said at a conference last week. “They figure out ways to make it work…long term, I’m very optimistic.”
The report wasn’t all good news. Investment in real estate tumbled last quarter for the first time in three years, likely due to unusually cold weather and rising mortgage rates. And some of the nation’s growth came from businesses stockpiling more inventory in anticipation of future demand–a trend that could reverse in coming quarters, economists say.
Additionally, mounting turmoil in emerging economies could weigh on growth overseas and hit U.S. exporters. The slide in international markets over the past week could become a hurdle if it weighs on investors and businesses and drags down Americans’ investment portfolios. That, in turn, might leave less room for consumers’ discretionary purchases.
Despite the expansion in consumer spending, it remains too slow for firms to raise their prices. A key gauge of inflation, the price index for personal consumption expenditures, rose at an annualized 0.7% during the quarter. That was well below the Federal Reserve’s annual 2% target.
Still, the economy grew 2.7% between the fourth quarters of 2012 and 2013, up from 2% the year prior, a sign of a clear acceleration throughout last year.
Aside from consumer spending, trade is becoming a reliable source of growth for the economy. U.S. exports soared 11.4% last quarter, the most in three years.
Columbus McKinnon, an Amherst, N.Y.-based maker of industrial hoists and rigging tools, is among those firms seeing strong demand from abroad.
“Because there’s more activity outside the U.S., it makes sense that American manufacturers are exporting more,” said Timothy Tevens, chief executive of Columbus McKinnon.
In response to growing demand abroad, Tevens’s company is investing in its international business, including expanding two of its facilities in Chinaby 40% early this year, and plans to increase hiring.
Now that the domestic economy is improving, U.S. businesses may become less cautious about making longer-term investments, after years of delaying such spending. Last quarter, spending on equipment grew 6.9%, up from an increase of just 0.2% the prior quarter.
C Squared Solutions, a consulting firm in Denver, is buying computer equipment and staffing up to meet growing demand.
The two-year-old firm sends experts to act as chief financial officers and chief operating officers at midsize companies. Because these companies, mostly in the software and business-services sector, are seeing a big upturn in demand, C Squared is beefing up, too, said managing partner David Johnson. The firm’s client roster and revenues doubled last year.
Now Johnson plans to double the firm’s staff to 20 and make capital investments valued at about 5% of the firm’s revenue, mostly in technology infrastructure to help firm employees communicate more effectively.
Clients are “expecting to grow more and don’t want to miss sales,” Johnson said. “The way things are shaping up, I think we’ll have 100% growth [in revenue] again in 2014,” he says.