US economy shrugs off shutdown with 3.2% growth in fourth quarter

Highest consumer spending levels in three years boosted growth, which had been hit by higher taxes and federal spending cuts

The US economy expanded at an annual rate of 3.2% in the last three months of 2013, the Commerce Department said on Thursday, as consumers and businesses largely ignored a government shutdown and fight over the debt ceiling.

The pace of growth slowed from 4.1% in the previous quarter but still means that US gross domestic product (GDP) the broadest measure of goods and services produced across the economy, grew at an annual rate of 3.7% in the last half of 2013, a pace unseen since 2003.

A weak first half of the year dragged the annual rate of growth down to 1.9% for all of 2013, down from 2.8% in 2012.

“When we take into account the near three-week federal government shutdown at the start of the quarter, the 3.2% annualized gain in fourth-quarter GDP growth is pretty impressive, particularly since it followed a 4.1% gain in the third quarter. The broader picture is that, as the massive fiscal drag diminishes, US economic growth is accelerating,” Paul Ashworth, chief US economist, Capital Economics wrote in a note to investors.

The fourth-quarter number, the Commerce Department’s first estimate of GDP in the period, benefitted from healthy gains in consumer spending as 2013 drew to a close. Personal consumption expenditures, which make up more than two-thirds of GDP, rose by an annual rate of 3.3%, the strongest pace in three years.

Economists had worried that a hike in payroll taxes at the start of the year, the 16-day government shutdown in October and the still unresolved fight over the debt ceiling would prove a drag on consumer and business spending.

The latest figures suggest both consumers and businesses largely shrugged off the battles in Washington.For consumers auto and household goods sales slowed but were offset by purchases of services and nondurable goods including clothing and footwear. Meanwhile, businesses boosted spending at an annualized 3.8% pace, with the bulk coming from investment in equipment.

In a note to investors PNC Bank chief economist Stuart Hoffman said: “After some weakness in the first half of 2013, the US economy appears to be hitting its stride. Consumers are slowly but steadily increasing their spending thanks to moderate job and income growth and gains in stock and home prices. After years of putting off purchases consumers are releasing some of their pent-up demand, buying big ticket items such as cars. Businesses are boosting their investment thanks to very good profitability, low interest rates, and less uncertainty over the economic outlook and government policy.”

The GDP figures come a day after the Federal Reserve announced it was intending to trim another $10bn a month from its giant economic stimulus programme, known as quantitative easing (QE). The third round of QE was launched in September 2012 and until last year meant the Fed was pumping $85bn a month into the bond markets in an attempt to encourage investment and keep interest rates low. On Wednesday the Fed made its second cut to QE, bringing the monthly investment down to $65bn a month, and said there was "growing underlying strength in the broader economy".

The GDP news cheered investors with all the US stock markets rising in morning trading after several days of losses. Turmoil in Turkey and fear that its problems could spread to other emerging markets have taken their toll on stock markets in recent days. The Dow Jones Industrial Average has closed down six of the past seven trading days and is now off 5.05% from its record high at the end of December.