U.S. GDP grew by a strong 3.2% in Q4

The U.S. looks set to break its run of sluggish growth, with GDP up by an annualized rate of 3.2 per cent in the October-December quarter.

Economists predict continued recovery in 2014

Chandler DeSouza, 5, right, looks through a section of educational games with his grandfather Hector while shopping in December. American consumer spending surged 3.3 per cent in the quarter, helping to power a resurgent economy. (Doug Strickland/Associated Press)

The U.S. looks set to break its run of sluggish growth, with GDP up by an annualized rate of 3.2 per cent in the October-December quarter.

The federal government shutdown in October put a drag on the economy in the fourth quarter of 2013, but consumer spending was at its highest level in three years, growing by 3.3 per cent.

Figures from the U.S. Commerce Department show GDP growth for 2013 was 1.9 per cent — less than the 2.8 per cent recorded in 2012 — with federal taxes and spending cuts blamed for the tepid full-year performance.

There are also signs of a recovering private sector, with exports surging by 11.4 per cent, while imports barely rose as the U.S. produces more of its own oil and gas.

Drag from fiscal policies

A combination of tax increases and spending cuts at the beginning of 2013 chopped about 1.5 percentage points from the U.S. economy last year, Conference Board economist Kip Beckman said in an analysis of the new figures.

 “In 2014, the public sector will only take roughly 0.4 percentage points out of the economy, thanks to a less restrictive fiscal policy,” he said.

Economists are generally bullish about the U.S. economy in 2014, predicting GDP growth of 2.7 per cent to more than 3 per cent.

“This is undeniably a solid report pointing to an economy that's about to take off in 2014,” TD economist Michael Dolega said, pointing to the strong consumer spending figures.

He also sees positive signs in residential building and the services sector.

“The rebounding housing market should translate into strong gains in residential investment, with the current pace of housing starts still some 50 per cent below demographic need.”

On Wednesday, the Fed cited an improving economy as its rationale for reducing its monthly bond-buying program to $65 billion US in February. It was the second tapering of the stimulus program, which is meant to keep interest rates low and free money to invest in the economy.

Lots of easy money

RBC economist Josh Nye notes that U.S. monetary policy remains very accommodative, as the Fed has said it will keep its benchmark rate at zero to 0.25 per cent for some time.

“Stronger economic activity will be accompanied by further improvement in labour markets, thus allowing the Fed to continue tapering asset purchases in $10 billion increments with new purchases ceasing toward the end of the year,” Nye said.

“However, with excess capacity keeping inflationary pressure limited, we expect the Fed funds rate will continue to be held in the exceptionally low range of 0-0.25% until late-2015, at which time stronger growth will have moved inflation back toward the Fed’s two per cent target,” Nye said.

The Fed has said it would like to see inflation approach two per cent, fearing that poor wage growth and low prices reflect excess capacity in the economy.

Stocks headed higher on the good news about fourth quarter growth.   The S&P/TSX composite index ended the day ahead 92.06 points to 13,735.28, throwing off the turmoil over emerging market currencies that had driven it lower in the past three days.

New York's Dow industrials rose 109.82 points to 15,848.61, the Nasdaq climbed 71.7 points to 4,123.13 and the S&P 500 index was ahead 19.99 points to 1,794.19.

With files from the Associated Press