The U.S. economy slowed to a crawl in the last three months of 2015, new government data showed Friday, an indication of how tepid global growth is exposing new weaknesses in the nation’s long and sluggish recovery.
Gross domestic product, a measure of overall output, expanded at a seasonally adjusted rate of 0.7 percent between the months of October and December — just the second time in seven quarters that the nation has registered growth less than 1 percent.
That pace shows an economy that is being driven by steady consumer spending but weighed down by powerful trends in currency market, where the strong dollar is raising the cost of America’s exported goods — everything from cars to iPhones — while trimming profits for manufacturers.
The anemic growth could drive new concerns about the U.S.’s ability to fight off a series of major headwinds, including downturns in China and other major economies. Though the U.S. labor market remains strong, the nation is struggling to push back against two realities: Consumers across the world are buying less, and American products are becoming more expensive for them.
At no other time in the past decade has trade been such a drag on GDP. The trade deficit — which subtracts from growth — turned a decent quarter into a weak one and a good year into a decent one. Remove trade from the equation, and annual growth in 2015 would have been 3.1 percent. But instead, it was 2.4 percent. In every year since 2010, GDP has expanded somewhere between 1.5 and 2.5 percent, a pace that edges other advanced countries but lags well behind the boom of the 1990s.
“A combination of a strong U.S. dollar and fading demand abroad is having a chilling effect on a broader cross-section of manufacturers,” Scott Anderson, chief economist at Bank of the West, said in an email.
The dollar is strong because investors view the U.S. economy as being relatively more robust and attractive than others in the advanced world. And the dollar’s appreciation is aided by monetary policy: The Federal Reserve is raising interest rates while central banks in Europe and Japan have been pushing rates down to boost growth.
In a surprise move, Japan on Friday cut interest rates below zero, aiming to weaken its currency and stimulate growth. That propelled stock markets across the globe, including the U.S., where all major indexes rose by more than two percent.
Over the last two years, the dollar has appreciated roughly 25 percent against the euro, 19 percent against the Japanese yen, and some 27 percent against the Canadian dollar. That’s great news for U.S. travelers, whose vacations abroad become cheaper. But it has hamstrung manufacturers, and recently companies such as Johnson & Johnson, DuPont, and Apple have blamed the dollar for weaker earnings.
Apple’s CEO, Tim Cook, opened an earnings call earlier this week with a long explanation about “foreign currency fluctuations” that have had a “very meaningful impact” on profits.
He mentioned weakening currencies in Turkey, Russia, Brazil and Southeast Asia.
He said that two-thirds of Apple’s revenue is now generated outside of the United States.
And because of currency changes, every $100 that Apple had earned abroad at the end of 2014 has turned now into $85.
“As you can see,” Cook said, “the movement has been dramatic.” Cook said Apple was dealing with “extreme conditions unlike anything we’ve seen before just about everywhere we look.”
The data released Friday morning by the Commerce Department provides at least one encouraging sign: Consumers, whose spending accounts for roughly two-thirds of the economy, are eating out at restaurants and buying refrigerators and new vehicles. Economists say they’re benefiting from a labor market that is adding more than 200,000 jobs per month and cheaper oil prices that are helping them save on gasoline. In the fourth quarter, personal spending grew at a solid 2.2 percent pace.
So long as that is maintained, said Gus Faucher, a senior economist at PNC Bank, “the U.S. economy is not in trouble.”
Many economists say that, over the next year, the value of dollar will stabilize, meaning that it won’t play severe games with U.S. growth. But for now, there remains a major gap between two of the most important measures of economic health, the labor market and the gross domestic product. Those data points typically move in tandem, but in the fourth quarter the labor market outpaced overall growth by the greatest margin since “at least 1990,” said Jason Furman, chairman of the White House’s Council of Economic Advisers.
“To the extent that the global slowdown persists, it will likely continue to weigh on U.S. export growth, as it has over the past year,” Furman said.
The U.S. created 851,000 new jobs between October and December, the best three-month stretch of 2015. Meantime, GDP in the fourth quarter was well behind the 2.0 and 3.9 percent paces from the third and second quarters.
Quarterly GDP readings can swing heavily, influenced by volatile factors such as the weather and government spending. In this case, growth was also hindered by a reduction in private inventories — the stock of supplies and materials that businesses keep on hand. The mining sector, ravaged by more than a year of low prices, also took a toll, with investment falling 40 percent in the fourth quarter. For the year, mining saw its biggest reduction in investment since 1986.