U.S. economic growth slowed in the fourth quarter

Last Updated Jan 29, 2016 10:21 AM EST

The U.S. economy slowed sharply in the final three months of 2015, but most forecasters expect growth this year to rebound and grow at a moderate pace.

The government's first read of growth in the last quarter of 2015 showed the economy expanded at a slower rate as American households curbed spending and corporations reduced capital investment.

Gross domestic product, or GDP, increased at a 0.7 percent annualized rate in the three-month period ending in December after a 2 percent increase in the prior quarter, the Commerce Department reported Friday.

The tally is the initial projection, with updates coming in the next two months as more data comes in.

"The fourth quarter itself was soft, but still things look good for 2016," said Gus Faucher, a senior economist at PNC Finanical Services. "Trade is a drag but other strengths of the economy more than offset that, so short of a global financial crisis I don't see the U.S. going into a recession or anything like that this year."

Jim O'Sullivan, chief U.S. economist with High Frequency Economics, cautioned against reading too much into the government's latest GDP figures, which can swing significantly from quarter to quarter. "We have seen the Q4 pattern on numerous occasions in recent years and each time employment growth remained strong and the weakening in GDP growth was not sustained," he said in a note.

Growth has tempered as companies contended with swollen inventories and weak export markets, with the U.S. economy negatively impacted by the global slowdown and the selloff in commodities. Positive offsets include the labor and housing markets, with consumers spending amid low inflation.

"This will be a third year in a row that we're expanding between 2 percent and 2.5 percent, so a slow and steady improvement," said Art Hogan, director of research and chief market strategist at Wunderlich Securities. "We have pockets of strength and pockets of weakness, that's the larger story. We don't have an economy that shows a great deal of unwinding."

The October-December period included a muted increase in pay for workers, with the employment cost index up 0.6 percent, according to another report from the Labor Department.

The economy started off on shaky ground in 2015, hampered in part by harsh winter weather and a labor stoppage by West Coast port workers, before bouncing back in the second quarter. GDP expanded 2.4 percent for the year.

The Federal Reserve is tracking the danger posed by recent declines in financial markets and global developments after hiking interest rates for the first time in nearly a decade in December. The slowdown in global growth lessens the changes of another rate hike by the central bank in March, with many observers now expected two hikes in 2016 rather than the four signaled by the Fed at the end of 2015.

The Fed on Tuesday held off on another rate hike.

Ian Shepherdson, chief economist with Pantheon Macroeconomics, thinks the slow pace of growth between October and December is unlikely to deter the central bank from continuing to raise rates later this year. He expects healthy payroll gains this year to lift employee wages. That would help drive consumer spending, which accounts for roughly 70 percent of U.S. economic activity.

Paul Ashworth, chief U.S. economist with Capital Economics, predicts that a pick-up in personal consumption will lift economic growth in the first half of 2016 to between 2.5 percent and 3 percent.

"Given the turmoil in financial markets, given the very low inflation, I expect two Fed fund rate increases this year," said PNC's Faucher. "But I don't think the higher rates are going to be a significant drag on growth."