U.S. Economy Grew 2.6 Percent in the Fourth Quarter: Solid Growth in Spending, but Pulled Lower by Net Exports, Inventories

The Bureau of Economic Analysis said that the U.S. economy grew by an annualized 2.6 percent in the fourth quarter, according to preliminary data. This was somewhat lower than the consensus estimate of around 3 percent, and it represented an easing from the 3.1 percent and 3.2 percent gains seen in the second and third quarters, respectively. Overall, the latest report found solid growth in consumer, business and government spending, but headline growth was pulled lower by both net exports and inventory spending. To illustrate the impact of those various components, real GDP growth would have been 4.35 percent absent the drag from net exports and inventories, which subtracted 1.8 percentage points from the top-line growth figure. Personally, I would not be surprised to see the growth rate revised up in the coming weeks.

In 2017, real GDP increased by 2.3 percent, up from 1.5 percent in 2016. Since the end of the Great Recession, the U.S. economy has expanded by 2.2 percent on average. Moving forward, we anticipate 3.0 percent growth in 2018—or something close to that, the consensus right now is around 2.7 percent. I continue to believe that there is upward potential in that outlook for next year, especially as firms increase their investments. Passage of comprehensive tax reform and other pro-growth measures should help to stimulate economic activity, hopefully allowing us to reach 3.0 percent annual growth for the first time since 2005.

Looking more closely at the underlying data in this report, consumer spending was the biggest bright spot. Personal consumption expenditures rose by an annualized 3.8 percent in the fourth quarter, up from 2.2 percent in the third quarter but the best reading since the second quarter of 2016. Durable and nondurable goods spending were jumped 14.2 percent and 5.2 percent, respectively, for the quarter. Service-sector spending increased by 1.8 percent. In total, personal spending contributed 2.58 percentage points to real GDP growth—suggesting that the other components of headline growth essentially offset one another. The good news here is that Americans opened their pocketbooks widely at the end of the year, boosting retail sales and, as seen here, the overall economy.

Business and government spending were also encouraging. Nonresidential fixed investment rose by 6.8 percent in the fourth quarter, led by robust growth in equipment spending, up 11.4 percent, the fastest pace in more than three years. Structures spending rebounded from a weather-related decline of 7.0 percent in the third quarter to a gain of 1.4 percent in the fourth quarter. Similarly, residential investment ended two quarters of sharp declines to jump by 11.6 percent in the fourth quarter. As a result, fixed investment in the economy rose 7.9 percent at the annual rate in the fourth quarter, adding 1.27 percentage points to real GDP.

Likewise, federal and state and local government spending increased 3.5 percent and 2.6 percent, respectively, in this report, with government expenditures adding another 0.50 percentage points to top-line growth.

In contrast to those readings, businesses spent less on inventories in the fourth quarter, subtracting 0.67 percentage points from real GDP. The silver lining, though, is that the reduction in stockpiles could necessitate additional production in the coming months—especially given the uptick in demand. That should be a positive for the first quarter of 2018.

Finally, there was mixed news on the international front, with net exports serving as the largest drag on real GDP growth in the fourth quarter, subtracting 1.13 percentage points from the headline number. On the positive side, goods exports were up a whopping 12.6 percent at the annual rate in the fourth quarter, its strongest growth rate in four years. Yet, those was more than offset by a 16.8 percent jump in goods imports in the quarter, its largest growth rate since the second quarter of 2010.

Chad Moutray

Chad Moutray

Chad Moutray is chief economist for the National Association of Manufacturers (NAM) and the Director of the Center for Manufacturing Research for The Manufacturing Institute, 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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