4th Quarter GDP Revision: Better Consumer Spending Offset by Weaker (but Still Positive) Business Investment

The Bureau of Economic Analysis said that the U.S. economy grew 1.9 percent at the annual rate in the fourth quarter, unchanged from an earlier estimate. This was slightly less than the consensus estimate for 2.2 percent, and it was slower than the 3.5 percent increase seen in the third quarter. In this revision, better consumer spending were offset by weaker (but still positive) investment. Nonetheless, the underlying trends were mostly the same. Real GDP growth was buoyed by modest growth in consumer and government spending, but net exports served as a drag on the headline number. Overall, the U.S. economy expanded 1.6 percent in 2016, down from its 2.2 percent post-recessionary average. Moving forward, I would expect 2.6 percent growth in real GDP in 2017 – a figure that will likely be assisted by pro-growth policies emanating from Washington.

Looking more closely at the underlying data, consumer spending on goods increased 5.7 percent at the annual rate in the fourth quarter, building on the 3.5 percent gain during the third quarter. Strength in durable goods purchases, including motor vehicles, boosted this figure. Personal consumption expenditures added 2.05 percentage points to real GDP in the fourth quarter, with 0.81 percent coming from services and 1.23 percent stemming from goods spending.

Business spending also served to fuel real GDP growth, with gross private domestic investment adding 1.45 percentage points to the top line. It was the largest contribution to real GDP since the first quarter of 2015. That was down, however, from a 1.67 percent contribution in the prior estimate, and the underlying data were mixed. Residential fixed investment and inventory spending both improved in the fourth quarter from the third quarter, but nonresidential fixed investment, which was up 1.3 percent, was spottier. Spending on structures declined 4.5 percent, with softer-than-desired growth for equipment, up 1.9 percent. The good news was that nonresidential fixed investment in equipment was positive in the fourth quarter after four straight quarters of negative growth.

Finally, a number of global headwinds have challenged manufacturers over much of the past two years, including a rapid appreciation in the U.S. dollar and economic softness to many key markets. Along those lines, the contribution to GDP from net exports slipped back into negative territory in the fourth quarter for the first time in 2016, subtracting 1.70 percentage points to the headline number. (Put another way, if it had not been for net exports, real GDP growth in the fourth quarter would have been 3.6 percent, not 1.9 percent.) Goods imports jumped 10.6 percent in this release, with goods exports down 6.6 percent.

Chad Moutray

Chad Moutray

Chad Moutray is chief economist for the National Association of Manufacturers (NAM), where he serves as the NAM’s economic forecaster and spokesperson on economic issues. He frequently comments on current economic conditions for manufacturers through professional presentations and media interviews. He has appeared on Bloomberg, CNBC, C-SPAN, Fox Business and Fox News, among other news outlets.
Chad Moutray

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