March 25, 2016 9:00 AM, EDT

Economy Grew 1.4% in Fourth Quarter, Supported by Consumers

Craig Warga/Bloomberg News

The U.S. economy grew in the fourth quarter at a faster pace than previously estimated, supported by stronger household spending that is helping cushion the expansion from weakness overseas.

The revised 1.4% increase in gross domestic product, the value of all goods and services produced, compares with the Commerce Department’s previous estimate of 1%, according to figures issued March 24. The economy grew 2% in the third quarter. The report also showed that corporate profits dropped in 2015 by the most in seven years.

The earnings slump illustrates the limits of an economy struggling to gather steam at the start of this year. Some companies, encumbered by low commodities prices and sluggish foreign markets, are cutting back on investment while a firm labor market and low inflation encourage households to keep shopping.

“It’s really U.S. consumers who are powering the global economy forward at this point,” said Gus Faucher, an economist at PNC Financial Services Group Inc. in Pittsburgh. At the same time, “there are pressures on businesses in terms of the stronger dollar, rising labor costs and slowing productivity growth” even as a rise in energy prices will help ease that drag for oil producers.

The median forecast of 73 economists surveyed by Bloomberg News called for fourth-quarter growth of 1%, with projections ranging from no change to a 1.4% gain. This is the last of three estimates for the quarter before annual revisions in July.

The figure marks a slowdown from the 2.2% average pace in the first three quarters of 2015. For all of last year, the U.S. economy grew 2.4%, matching the advance in 2014.

The fourth-quarter growth figure reflected more spending on services, particularly on recreation and transportation. Exports also declined less than previously estimated.

Household purchases, which account for almost 70% of the economy, rose at a 2.4% annual pace, compared with a previously estimated 2% rate. Personal consumption added 1.66 percentage points to growth.

Weak overseas demand has weighed on net exports, with trade subtracting 0.14 percentage points from overall growth after a previously reported 0.25 percentage point. The gap in goods and services trade may stay wide as the U.S. economy plods ahead and foreign markets, including China, struggle to improve.

Inventories subtracted 0.22 percentage point from growth compared with a previous estimate of a 0.14 percentage-point drag. American companies are still trying to get stockpiles more in line with demand.

Stripping out inventories and trade, the two most volatile components of GDP, so-called final sales to domestic purchasers increased at a 1.7% rate, compared with a previously estimated 1.4% pace.

The March 25 report also offered a first look at corporate profits for the period. Pre-tax earnings declined 7.8%, the most since the first quarter of 2011, after a 1.6% decrease in the previous three months. The estimate of nonfinancial corporate profits was reduced by a $20.8 billion settlement, considered a transfer to the government, between BP and the U.S. after the 2010 oil spill in the Gulf of Mexico.

Profits in the U.S. dropped 3.1% in 2015, the most since 2008. Earnings are being weighed down by weak productivity, rising labor costs and the plunge in energy prices.

“If profits remain depressed, the prospects for capex and hiring will come under greater pressure,” Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina, wrote in a research note.

Corporate outlays for equipment declined at a 2.1% annualized pace, subtracting 0.12 percentage point, the Commerce Department said.

A strengthening labor market is supporting steady U.S. household demand even as factories continue to struggle amid the global slowdown. Employers added 242,000 workers to payrolls in February and the unemployment rate held at an eight-year low of 4.9%. Firings linger near four-decade lows.

Consumers have also been buoyed by gasoline prices. The cost of an average gallon of regular gasoline was $2.01 as of March 23, compared with $2.40 on average for all of 2015, according to motoring group AAA.