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January 26, 2018 Blog 2 min read

Economy grows at 2.6% clip in Q4; consumer spending strengthens.

Bar graph showing GDP QoQ History

The economy grew at a 2.6% pace in the final quarter of 2017, falling short of expectations for 3.0%, according to the first estimate released by the Commerce Department this morning. For the year, the economy grew by an estimated 2.3%. While still a solid result, today’s report indicates that top-line growth moderated after two consecutive quarters of growth in excess of 3%.  With two revisions forthcoming over the next two months, it’s possible that those updates could carry the top-line growth number back to the expected 3%, but that remains to be seen.

Despite the modest disappointment in the top-line number, there were a number of positives within the report.  Personal consumption rose sharply in the fourth quarter from just 2.2% in Q3 to a strong 3.8%, with purchases of durable goods in particular surging by 14.2%.  Residential investment also surged by 11.6%, reversing two negative quarters. The strong consumer spending numbers speak to the strength of the labor markets, the wealth effect underpinned by rising home prices and an outstanding bull market in stocks, and an exceptionally confident consumer base that is willing to spend.

 

Business investment also remains on an upswing, particularly in property and equipment. A reduction in inventories curtailed top line GDP growth by 0.7%, effectively reversing the benefit of inventory build in Q3.  Inventory numbers tend to bounce around a bit though and create some noise quarter to quarter.  Remove that whipsaw effect from Q3 and Q4 and growth still clocked in at better than 2.8% over the back half of 2017.

 

The greatest negative effect came from trade, as a sharp increase in imports subtracted nearly 2%.  While consumer and business spending was up, the fact that more dollars were directed to purchasing foreign-made goods blunted the benefit of that spending here at home.

 

Looking toward 2018, the first quarter holds some questions.  Reported Q1 growth in the U.S. has been unusually weak for many, many years, suggesting an unexplained shortcoming in the seasonal adjustment calculations that rears its ugly head each spring.  At the same time, consumers should be seeing their take-home pay increase to varying degrees, as the tax cuts become reality.  What will that all mean for reported numbers?  We’ll have to wait and see.

 

Against the backdrop of an already highly confident consumer sector, that additional discretionary income in the coming months should provide a bit more fuel to the fire for an economy that is already performing quite well. 

 

At the same time, labor markets already tight and inflation edging higher, the Fed will be watching for any signs that the economy may be at risk of overheating.  That doesn’t appear imminent, but could become more of a story in 2018.

 

The bottom line is this: the economy continues to grow at an above trend pace, supported by not only a confident consumer sector, but a business sector that is not only hiring, but reinvesting in the economy in a way that it hasn’t in a long time. 

Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.

 

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