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March 28, 2018 Blog 2 min read

Growth nears 3% in the fourth quarter.

chart showing GDP History 

With the third estimate for fourth quarter GDP now on the books, the story is still a good one.  The economy grew at a 2.9% pace in the final three months of 2017, exceeding consensus expectations for a final print of 2.7%.

 

For the year, the economy grew at a 2.3% pace, weighed down by weak first quarter growth. With that tepid start in the rear view mirror, the economy grew at an average pace exceeding 3.0% over the final nine months of the year. 

 

Consumer spending growth accelerated to 4.0% in the fourth quarter, the fastest pace of growth in three years.  Spending was solid across all categories, although the 13.7% increase in spending on durable goods was particularly noteworthy. 

 

The strength of the labor market and the positive wealth effect from increasing home and portfolio values last year continued to lift consumer spirits. The result? Confident consumers and households that were emboldened to spend, contributing to the virtuous cycle of demand fueling strong business conditions, supporting both solid job creation and slowly improving income growth.

 

Multiple measures of the consumer mood have been unambiguously positive for some time, although the recent volatility in equity markets and growing concerns about the potential for a widening trade conflict could weigh on sentiment. Having said that, many households don’t view their financial position through the lens of their portfolio, focusing instead on their job stability and income growth. Further, the potential risk presented by tariffs and a tit-for-tat exchange with major trading partners may be too murky to grasp unless and until they become reality.

 

Tomorrow’s consumer sentiment report will shed some additional light on the evolving consumer mood, but it seems unlikely that either of these developments will weigh materially on sentiment. The bottom line is that strong growth, fueling solid job creation, extremely low layoffs, and signs of improving wage growth are all likely to provide a continued boost to the collective consumer demeanor and household spending.

 

Looking ahead, one potential boost to growth that will start to have an effect is the near-term benefit of lower individual and corporate taxes. On the individual front, some portion of those cuts will fuel spending, particularly those that accrued to lower and middle income taxpayers. Moreover, the reduction in corporate tax rates and the repatriation of cash to the U.S. may provide an additional boost to corporate investment, with some portion will also undoubtedly be passed through to investors.

 

The bottom line is that the U.S. economy remains on a solid footing.  Recent concerns about a potential widening trade conflict notwithstanding, the overall outlook remains quite good.

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