Summary

• US GDP growth was relatively lower in 4Q14 at 2.6% compared to 3Q14 growth of 5.0%. However, GDP growth is likely to remain robust in 2015.
• Personal consumption expenditure will continue to drive GDP growth with expectations of higher wages growth further triggering spending upside.
• US disposable income has been increasing while the savings rate is on a decline. This is a positive trend from a consumption growth perspective.
• Consumption based themes will continue to do well in 2015 and I remain bullish on US stocks.

The advanced estimates for US fourth quarter GDP suggest that the country’s GDP expanded by 2.6%. While GDP growth remains robust in 4Q14, growth was significantly lower than 3Q14 GDP growth of 5.0%. However, the relatively lower GDP growth does not imply that the economy is getting weaker. This article discusses the reasons to believe that US GDP growth will remain robust in the coming quarters from a consumption growth perspective.

The first point that I want to make here is that US personal consumption expenditure contributed 2.9% to GDP growth in 4Q14, up from 2.2% in 3Q14 and 1.5% in 2Q14. Therefore, the segment is the key growth driver for the US economy and if PCE remains strong, GDP growth is likely to remain robust in the coming quarters.

There are three important reasons to believe that PCE will remain strong in the coming months.

First, US consumer sentiment rose in January 2015 to its highest level in 11 years on better job and wage prospects. Therefore, positive consumer sentiment continues in 2015 and this will keep the PCE robust.

Second, expect income growth is likely to be robust as evident from the chart below.

Improvement in the job market in terms of lower unemployment coupled with strong increase in wages growth is likely to keep the PCE robust.

Third, the divergence in real disposable income and savings rate is a great indicator of the current trend in the US economy.

As the consumer sentiment increases coupled with significant improvement in the job market, the disposable income for US consumers in increasing at the same time when personal savings rate in also declining. Both these factors boost overall consumption and ensure that the PCE remains strong in the coming quarters.

Considering these factors, there is no immediate concern or cause of alarm for the US economy and US equities (NYSEARCA:SPY ) even when the 4Q14 GDP growth seems significantly tapered as compared to 3Q14.

I must also add here that in 3Q14, government spending added 0.8% to GDP growth (primarily defense spending) while the contribution of the government sector to GDP growth in 4Q14 was negative 0.4%. I believe that the private sector is the dynamic sector of the economy and gives a better reflection of growth and from that perspective, 4Q14 growth is robust.

From an investment perspective, robust growth in the PCE implies that all consumption based themes are likely to do well in the coming quarters. I would specifically like to mention the healthcare sector as growth has been consistent in the sector due to demographics factor. The Vanguard Healthcare ETF (NYSEARCA:VHT ) is a good investment option in the healthcare sector.

Among individual stocks, I like Wal-Mart (NYSE:WMT ) and I had written in the past on the stock and the reasons to remain bullish on the stock for 2015. With PCE remaining strong and with consumer sentiment at an 11-year high in January 2015, I maintain my bullish view on Wal-Mart.

I also like Chipotle Mexican Grill (NYSE:CMG ) and with the company due to report its earnings on February 3, 2015, it might be an interesting time to consider exposure to the stock. The company’s same-store sales has been robust for the nine months ended September 2014 and I expect the strong trend to continue as the results would include the impact of festive season sales.

From a broad sector exposure perspective, the Vanguard Consumer Staples ETF (NYSEARCA:VDC ) and the Vanguard Consumer Discretionary ETF (NYSEARCA:VCR ) look interesting.

Overall, US GDP growth is likely to remain strong and I believe that the strength in the economy will sustain at least for the first two quarters of 2015. The second half 2015 economic activity and growth will depend on how other developed markets recover. Failure of the QE to revive growth in the eurozone and Japan can weaken the 2H15 outlook.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More. ) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.