Bank of the West US Outlook Report for January 2, 2015

 US Outlook Report: GDP with a 5.0 Handle- What Does it Mean?

The U.S. economy confidently shifted to a higher gear of expansion in the third quarter of 2014, growing at an impressive 5.0 percent annualized rate, according to the “third” estimate of real GDP, reported by the Bureau of Economic Analysis. This was the greatest reading since the third quarter of 2003 and stands much higher than the median forecast of 75 economists, surveyed by Bloomberg, projecting a 4.3 percent increase.

The 1.1 percentage point upward revision to the rate of Q3 growth of real GDP was driven by greater consumer spending, an upward adjustment of business investment across the spectrum, increased private inventories, and stronger expansion of state and local government expenditures.

Business investment, a notoriously cyclical component of GDP that is highly dependent on business confidence, increased at a solid 8.9 percent annualized pace in the third quarter. At the same time, corporate profits after tax increased at a 20 percent annualized pace in the third quarter. Solid business confidence and profits should clear the way for sustained and steady business investment growth in 2015.  Non-residential fixed investment, which includes investment in commercial structures, equipment, and intellectual property, is expected to grow 5.3 percent in 2015, with equipment spending leading the way. This is just a touch lower than 2014’s 6.1 percent expected growth rate.

While the 5.0 percent handle on Q3 GDP is a welcome development that gets the U.S. economy closer to its full potential, such a rapid pace of growth is not sustainable over the long run. That said, the U.S. expansion is now broad-based and sustainable into 2015. Business investment has become a bigger piece of our economy in 2014 as robust corporate profits, low interest rates, and improving confidence helped businesses take the plunge on business investment.  But as 2015 evolves, corporate profits as a share of the economy will likely peak, interest rates are expected to head higher, and business confidence is already at high levels.  Some deceleration in business investment growth can be expected.

To find out more check out this week’s US Outlook Report.

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