(Bloomberg) — American households picked up spending in
the fourth quarter and remained confident in early 2015,
indicating the economy is poised to overcome any bumps caused by
slower global demand.

The biggest gain in consumer purchases in four years helped
gross domestic product expand at a 2.2 percent annualized rate
at the end of 2014, although that was less than previously
estimated, according to Commerce Department data issued Friday
in Washington. Other reports showed household sentiment held
close to an 11-year high, manufacturing in the Chicago area
shrank and more people signed contracts to buy a home.

An improving job market and genrally cheaper fuel probably
will help sustain consumer spending, which accounts for almost
70 percent of the economy. That will be critical in supporting
the expansion as the lingering effects of the work stoppage at
West Coast ports and harsh winter weather, combined with a
rising dollar and slower growth among trading partners, hold
back American factories.

“The consumer looks relatively solid,” said Michael
Carey, chief economist for North America at Credit Agricole CIB
in New York. “We’re looking at an increase in domestic demand,
which is good because we’re one of the few economies out there
that is growing relatively strongly.”

Stocks fell, paring the best month for the Standard &
Poor’s 500 Index since 2011, as technology shares slumped. The
S&P 500 declined 0.3 percent to 2,104.5 at the close in New
York.

Revised Down

The GDP reading was revised down from a prior estimate of
2.6 percent, restrained by a smaller gain in stockpiles and
widening trade gap.

The median forecast of 83 economists surveyed by Bloomberg
called for a 2 percent advance. Projections ranged from 1.5
percent to 2.5 percent. This is the second of three estimates
for the quarter, with the final release scheduled for March when
more information can be incorporated.

The University of Michigan’s final consumer sentiment index
for February came in at 95.4 compared with the prior month’s
98.1 that was the highest since the start of 2004. It was the
first time the gauge decreased in seven months and represented
an improvement from a preliminary reading of 93.6.

“Ultimately, the strong job environment and strong U.S.
economy are playing a big role in supporting consumer
confidence,” said Jennifer Lee, senior economist at BMO Capital
Markets in Toronto.

Consumer Spending

The GDP report showed household consumption grew at a 4.2
percent annualized rate in the fourth quarter, the most since
the last three months of 2010. Demand for services climbed 4.1
percent, the most since 2000.

Revisions to third-quarter personal income also showed the
picture brightening. Wages and salaries rose by $87.2 billion, a
$20.5 billion improvement from the prior estimate. Preliminary
data for the fourth quarter showed a $94.4 billion advance.

Job growth has strengthened over the past year, with
payrolls rising 257,000 in January to cap their strongest three-month run in 17 years.

Companies such as Target Inc. are benefiting from the
improvement in consumers’ balance sheets. The Minneapolis-based
company posted earnings for its fiscal fourth quarter that
topped analysts’ estimates, lifted by a gain in holiday sales.

‘Healthier’ Consumer

“We recognize that the consumer confidence has certainly
improved,” Chief Executive Officer Brian Cornell said in a Feb.
25 conference call, adding that lower gasoline prices have been
helping the retail industry. “The consumer, we do believe, is
healthier, and we’re pleased that they are spending in our
stores, both in our stores and online.”

Federal Reserve policy makers are expecting growth to pick
up this year, as they weigh the timing of their first interest
rate increase since 2006. The central tendency of Fed-official
estimates projects GDP will climb between 2.6 percent and 3
percent.

“If economic conditions continue to improve, as the
Committee anticipates, the Committee will at some point begin
considering an increase in the target range for the federal
funds rate on a meeting-by-meeting basis,” Fed Chair Janet
Yellen said in congressional testimony on Feb. 24-25. GDP “is
expected to be strong enough to result in a further gradual
decline in the unemployment rate.”

Manufacturing Struggling

One area struggling to sustain momentum recently has been
manufacturing. The Institute for Supply Management-Chicago
Inc.’s business barometer slumped to 45.8 in January from 59.4
the prior month, according to a report Friday.

It was the first time the measure dropped below 50,
signaling contraction, since April 2013. The 13.6 point plunge
was the second-biggest in data going back to 1979, only behind a
19.2 point plunge at the height of the meltdown in financial
markets in October 2008.

The magnitude of the drop suggests special circumstances,
such as the work stoppage at West Coast ports or bad weather,
were at play, although that’s difficult to prove, economists
said.

“It’s first and foremost likely a distortion from the port
effect,” said Michael Gapen, the New York-based chief U.S.
economist at Barclays Plc.

The number of days it took to source capital equipment was
the most since 2008, the Chicago report showed.

The effects of a recently resolved dockworker contract
dispute are still rippling through the U.S., as the nation’s two
busiest seaports — Los Angeles and Long Beach — work through
their biggest backlog of ships in a decade.

Port Slowdown

The Pacific Maritime Association, which represents
management, and the International Longshore and Warehouse Union,
representing 20,000 dockworkers, reached the deal on a five-year
contract Feb. 20 after U.S. Labor Secretary Tom Perez imposed a
deadline to resolve the nine-month dispute. The conflict had led
to backups that stranded merchandise at sea, while retailers and
manufacturers sent products by air and diverted to ports on the
East and Gulf Coasts.

The influence of a rising dollar, which makes American
goods more expensive for foreign customers, will be more
difficult to overcome. The dollar index, a gauge of its value
against major world currencies, climbed Thursday to the highest
level in more than a decade.

A worsening trade deficit already hurt the world’s largest
economy last quarter, although it was due to a surge in imports
as American consumers spent more. The difference between exports
and imports shaved 1.15 percentage point from growth, according
to the Commerce Department’s GDP report.

Inventory Situation

Stockpiles grew at a slower pace than previously projected,
rounding out the biggest culprits behind the downward revision
in GDP.

Stripping out inventories and trade, the two components of
GDP that are most vulnerable to swings, so-called final sales to
domestic purchasers increased 3.2 percent, exceeding the
previously reported 2.8 percent advance.

“Despite all the crosscurrents that we’re seeing across
the world, the consumer is most likely to drive growth in 2015
for the U.S. economy,” said Sam Bullard, a senior economist at
Wells Fargo Securities LLC in Charlotte, North Carolina.
“Fundamentals for the consumer remain supportive for increased
consumer spending in 2015, reflecting healthy job growth and low
inflation that is increasing purchasing power.”

A report showing more Americans signed contracts to
purchase previously owned homes in January rounded out a week of
housing data that depicted an uneven recovery. The index of
pending sales climbed 1.7 percent after a 1.5 percent drop the
prior month that was smaller than initially estimated, according
to data from the National Association of Realtors.

Economists consider pending sales a leading indicator
because it tracks contract signings, as opposed to purchases of
existing homes, which are tabulated when a deal closes,
typically a month or two later.

To contact the reporter on this story:
Victoria Stilwell in Washington at
vstilwell1@bloomberg.net

To contact the editors responsible for this story:
Carlos Torres at
ctorres2@bloomberg.net
Vince Golle