The advance estimate of GDP released revealed that the U.S. economy grew at a 1.9% pace in the fourth quarter, moderately undershooting the consensus expectation of 2.2%. Although widely expected, this morning’s release represents a notable deceleration in growth from the third quarter’s robust 3.5% rate.
Consumer spending growth eased for the second consecutive quarter, but still expanded by 2.5%. Spending on goods was solid – particularly on durable goods (up 10.9%), which has expanded at or near a double digit pace for the past three quarters. Consumer spending on services softened; that decline was almost exclusively attributable to weaker spending on utilities and housing services.
Private investment provided a solid boost to growth, its 10.7% gain representing the strongest advance in over two years. Much of that increase was attributable to the second consecutive quarter of restocking of business inventories after five quarters of consistent drawdowns.
Far and away, the biggest drag was directly attributable to the trade deficit, which trimmed 1.7% from top-line growth. The stronger dollar contributed to a combination of falling exports and surging imports late in the year. The potential for continued dollar strength remains a risk to the economy moving forward.
Tightening labor market conditions are now driving stronger wage growth, providing fuel for consumer spending. Sentiment has surged in recent months the potential for a pro-growth policy focus in Washington has generated a greater degree of hopeful optimism. However, the real work lies ahead and it’s quite possible that expectations for what policymakers will deliver are too exuberant.
The Fed has positioned the economy to be prepared for a handoff from monetary to fiscal stimulus and appears poised to act upon those stated goals in the coming months. Low joblessness and stronger inflation will likely necessitate that tightening, making some success on the fiscal policy front all the more important.
The bottom line is that the economy’s advance in the fourth quarter was lukewarm – much as expected – but we should be careful not to assume that the economy will grind slower moving forward. For years, it’s been all about household spending, and consumers still look well-positioned today for further spending growth. Renewed business optimism about the potential for tax and regulatory reform has the potential to be a greater source of strength, but will hinge on actual policy change and not just campaign promises. Thus far, President Trump has shown no signs of backing away from his pledges. The next few months will prove to be enlightening and should provide a greater sense of what his administration will be able to accomplish.