The economy slowed late in 2016, but less than previously believed, based on the latest revisions from the Bureau of Economic Analysis. In the fourth quarter, the economy grew at a 2.1% pace, a result that modestly exceeded economist expectations for 2.0%. The prior report indicated that growth had slowed to 1.9% for the period.
That upward revision was insufficient to move the needle on growth for the year, which held steady at 1.6%. Growth in 2016 was a full percentage point lower than in 2015, largely due to an extremely soft first half of the year, when growth clocked in at just 1.1%.
Better consumer spending was the primary driver of the upward revision, as personal consumption grew at a solid 3.5% clip during the quarter. Spending on services was revised sharply upward to an increase of 2.4% (vs. 1.8% in the prior report), while spending on nondurable goods was also ramped up from 2.8% to 3.3%.
Without question, the consumer remains the primary engine of the U.S. economy. Solid job creation, increasingly tight labor market conditions, and nascent signs of stronger wage growth should all prove supportive of the ability of consumers to spend. With various measures of the consumer mood soaring this year, that ability should be coupled with a willingness to do so.
The bottom line is that the consumer outlook still looks positive – a critical factor that should bode well for the economy as a whole.
The post-election surge in business sentiment is broadly expected to support stronger investment – a key support to stronger growth that has been largely elusive thus far in the current expansion.
Increased confidence was predicated on President Trump’s ability to implement his pro-growth agenda, and that the agenda itself would have the desired impact. The recent failure to push through his first signature piece of legislation illustrates the difficult political road ahead. If President Trump struggle to get tax reform or a substantial infrastructure spending bill through Congress, the broadly optimistic mood could easily fade. At some point, tangible results will be needed to keep hope for stronger growth alive.
Nonetheless, the economy appears to still be on a firm footing; the primary question is whether the next few years will resemble the last several years with growth of around 2% or whether better days lie ahead.