Consumers Lead Economy As Factories Falter

The U.S. economy expanded modestly at the end of 2014, but consumers spent at the fastest pace in four years, the Commerce Department said Friday.

Gross domestic product rose at a 2.2% rate in Q4, less than the 2.6% rate initially estimated. But consumer outlays grew 4.2%.

An improving job market and generally cheaper fuel probably will help sustain consumers. That will be critical as the lingering effects of the West Coast ports work stoppage, 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. "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.

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

Companies such as Target (TGT) are benefiting. The discount retailer on Feb. 25 topped fiscal Q4 earnings forecasts.

"The consumer, we do believe, is healthier, and we're pleased that they are spending in our stores," said CEO Brian Cornell in a post-earnings call, adding that lower gasoline prices have been helping retailers.

The Federal Reserve expects growth to pick up in 2015, as it weighs the timing of its first interest-rate hike since 2006.

"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," Fed Chairwoman Janet Yellen told Congress on Feb. 24-25.

One area struggling to sustain momentum has been manufacturing. The Institute for Supply Management-Chicago said Friday its regional factory index dived to 45.8 in February from 59.4 in January. It was the first sub-50 reading, signaling contraction, since April 2013. The 13.6 point plunge, the second-worst back to 1979, suggests special factors, such as the ports work stoppage or bad weather.

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

ISM releases its national manufacturing index on Monday.