It may have been delayed by a month, but the Commerce Department’s first look at the economy in the fourth quarter wasn’t terribly surprising. As expected, growth slowed in the closing months of the year. Still, growth exceeded expectations. As we’ve stated for some time, however, “slower growth” is far from “no growth”, and in this case, slower growth was still quite good. With hindsight, the erosion of sentiment and the sharp decline in stock prices in late 2018 appear to have been overdone.
The economy grew at a 2.6% pace in Q4, as it cooled for the second consecutive quarter. Still, it was the best Q4 growth pace in the U.S. since 2013 and exceeded consensus expectations for a more pronounced slowdown to 2.3%.
Personal consumption – the largest driver of the economy – expanded at a 2.8% pace. Spending on goods slipped modestly, but the greatest impact was a decline in spending on restaurants and hotels.
For the year, the economy grew by 2.9%, matching 2015 for the strongest calendar year growth rate since the financial crisis and recession. For all the hand-wringing and angst, you’d have to go back to 2005 to find a year in which the economy grew at a faster pace.
Concerns related to trade and the government shutdown had a significant impact on sentiment and stock prices late last year, but had a more limited effect on actual activity. The sharp improvement in consumer sentiment and rebound in equity markets since the beginning of the year are positive signs, but are similarly unlikely to provide a material lift to growth.
Although the shutdown started in late December, it extended through much of January. Consequently, the drag from the shutdown will be more apparent in the first quarter growth results than in these results.
The bottom line is that 2018 was a strong year for the economy, even if growth peaked mid-year. The headwinds that exist and are likely to be apparent in slower Q1 growth appear to be temporary, and are unlikely to have a lasting effect. For now, the virtuous cycle continues.
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