There are two takeaways from today’s report on fourth quarter GDP. First, the economy slowed moderately in the fourth quarter of the year despite a meaningful pickup in consumer spending. Second, government statisticians apparently performed well in preparing the first estimate, as revisions in this iteration were small in scale and limited in number.
The economy grew at a 2.5% pace to close out 2017 – slower than in the preceding two quarters, but sufficient to lift growth for the year to 2.3%, compared to growth of just 1.5% in 2016. Economists had expected growth in that range.
Following strength in Q3 GDP, the fourth quarter gain was mainly attributable to stronger personal consumption expenditures, business investment, residential construction, and government spending.
So why the slowdown in growth? A sharp increase in imports indicated that much of that increase in consumer spending was directed to imported goods, blunting the domestic impact of those spending gains. Second was a large drawdown in inventories, which shaved 0.7% off top-line growth.
Looking forward, the outlook remains quite good. Consumer confidence in February reached a 17-year high, even as tight labor market conditions are showing signs of boosting wage growth. At the same time, many households are just starting to see the benefit of lower federal taxes in their take-home pay.
A combination of an exceptionally optimistic consumer base and growing discretionary income should provide further fuel for household spending growth – a key ingredient to the overall health of the economy.
Notably, with nearly 90% of S&P 500 companies reporting, about three quarters have reported both sales and earnings that have exceeded expectations. Looking forward, lower corporate taxes and, for many multi-nationals, the return of capital to the U.S. is further enhancing cash flows. Strong corporate performance is an important input into hiring and capital investment decisions, and positive developments in the corporate sector should also provide a near-term boost to the economy.
More recently, there have been more hints of concern about the potential for the economy to overheat with the additional stimulus that will be hitting the economy in the coming quarters. While that is arguably a risk, inflation remains very well in check, at least for now. The Fed is already positioned to raise short-term rates in the coming year, but rates remain quite low – still negative on an inflation-adjusted basis. The bottom line is that monetary policy remains quite accommodative, but evidence of a strengthening economy and the potential for further acceleration fueled by fiscal stimulus are likely to keep the Fed on its prescribed tightening path.
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