Economic growth in the US slowed considerably from its pace in the middle of 2014, according to the advance estimate released today by the Bureau of Economic Analysis. Fourth quarter GDP rose only 2.6% on an annualized basis, a falloff of almost half of Q3’s final GDP:

Real gross domestic product — the value of the production of goods and services in the United States, adjusted for price changes — increased at an annual rate of 2.6 percent in the fourth quarter of 2014, according to the “advance” estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 5.0 percent.

The Bureau emphasized that the fourth-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 4 and “Comparisons of Revisions to GDP” on page 5). The “second” estimate for the fourth quarter, based on more complete data, will be released on February 27, 2015.

A significant part of that growth came in inventory adjustment. Real final sales of domestic product, a better indicator of sales transactions, only rose 1.8%:

Real final sales of domestic product — GDP less change in private inventories — increased 1.8 percent in the fourth quarter, compared with an increase of 5.0 percent in the third.

That’s a sharp dropoff indeed. Interestingly, it’s not coming from consumer spending:

Real personal consumption expenditures increased 4.3 percent in the fourth quarter, compared with an increase of 3.2 percent in the third. Durable goods increased 7.4 percent, compared with an increase of 9.2 percent. Nondurable goods increased 4.4 percent, compared with an increase of 2.5 percent. Services increased 3.7 percent, compared with an increase of 2.5 percent.

In fact, the decline appears to have come in large part from government spending at the federal level:

Real federal government consumption expenditures and gross investment decreased 7.5 percent in the fourth quarter, in contrast to an increase of 9.9 percent in the third. National defense decreased 12.5 percent, in contrast to an increase of 16.0 percent. Nondefense increased 1.7 percent, compared with an increase of 0.4 percent. Real state and local government consumption expenditures and gross investment increased 1.3 percent, compared with an increase of 1.1 percent.

Compare this to the final Q3 GDP report. Defense spending rose 16% in Q3, whose initial report came out just before the midterm elections, and which helped push the advance estimate to 3.5% on the way to a 5.0% final estimate. What caused defense spending to go up 16% in the quarter before the midterms — which, by the way, was the final quarter of the previous federal budget — and then drop 12.5% in the next under a CR that kept spending levels the same as in FY2014? Hmmm.

Imports, which negatively impact GDP, rose significantly as well, much higher than exports:

Real exports of goods and services increased 2.8 percent in the fourth quarter, compared with an increase of 4.5 percent in the third. Real imports of goods and services increased 8.9 percent, in contrast to a decrease of 0.9 percent.

The report includes an odd decline in the price index for consumer purchases, the result of the collapse in oil prices that began late last year and which continues today. Steve Eggleston e-mails a comment about its implications:

Perhaps lost in all the coverage over the disappointing GDP number is the fact that the BEA is now reduced to declaring a deflation to get the number even close to the lower end of expectations. The price index for gross domestic purchases (mentioned in the press release) declined by 0.3% annualized overall (in contrast to a +1.4% annualized for Q3) and increased by only 0.7% annualized excluding food/energy (contrasted to +1.6% annualized in Q3). That drove the overall implicit price deflator (buried in the tables) to -0.1%, turning it into an implicit price inflator, and turning a horribly-weak 2.5% nominal GDP growth into a slightly-less-weak 2.6% real GDP growth.

Deflation for the “win”, I guess.

CNN Money called the results deflating in another sense:

The U.S. economy gained steam last year, but it closed out the year with a big disappointment, raising more questions about 2015.

America’s economy grew only 2.6% in the final three months of the year, much lower than the estimate of 3.3%.

Overall for 2014, U.S. gross domestic product, the broadest measure of economic activity rose 2.4%. That’s the highest mark in four years, according to the Commerce Department, but economist and policymakers want to see growth this year of a lot closer to 3%.

It’s the highest mark in four years, but it’s still a stagnation level of growth. It’s not enough of a recovery to fuel the kind of job creation necessary to make a dent in the chronically unemployed and raise the workforce participation rate (now at 62.8%) back to the level it was when the recovery began in June 2009, 64.7%.

CNBC looked optimistically at the consumer spending surge as an indication of continuing strength:

Gross domestic product expanded at a 2.6 percent annual pace after the third quarter’s spectacular 5 percent rate, the Commerce Department said in its first GDP snapshot on Friday.

The slowdown, which follows two back-to-back quarters of very strong growth, is likely to be short-lived given the enormous tailwind from lower gasoline prices. Most economists believe fundamentals in the United States are strong enough to cushion the blow on growth from weakening overseas economies.

Still, this will make it a lot more difficult for Barack Obama to make a pitch for a 7% increase in federal spending on the basis of a robust economy:

Declaring an end to “mindless austerity,” President Barack Obama called for a surge in government spending Thursday and asked Congress to throw out the sweeping budget cuts both parties agreed to four years ago when deficits were spiraling out of control.

Obama’s proposed $74 billion in added spending — about 7 percent — would be divided about evenly between defense programs and the domestic side of the budget. Although he’s sought before to reverse the “sequester” spending cuts, Obama’s pitch in this year’s budget comes with the added oomph of an improving economy and big recent declines in federal deficits. …

Republicans promise to produce a balanced budget blueprint this spring even as they worry about Pentagon spending. The Senate’s No. 2 Republican, John Cornyn of Texas, dismissed the Obama proposals as “happy talk,” while Sen. Pat Toomey of Pennsylvania chided the president for “abandoning spending discipline.”

Mindless austerity? Here’s a chart showing outlays and income in federal budgets from the White House’s own data:

In FY2015, we are poised to spend almost a trillion dollars more than we did in FY2008 (in outlays, not proposals), the last budget signed by George W. Bush. In FY2013, we returned to the spending level of FY2010, the last budget produced entirely by Democrats. Where, exactly, do we see “mindless austerity” in this chart? What we do see in White House projections is mindless profligacy, which Obama apparently wants to accelerate now that he has no control over Capitol Hill budgeting.