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Economic Growth Steady in 2018

| March 18, 2019
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The Bureau of Economic Analysis posted its first estimate of US economic growth in February following a one month delay due to the government shutdown in January. The report shows that the US economy grew 2.6% in the fourth quarter, down from 3.4% in the third quarter and 4.2% in the second quarter but in-line with the longer-term average for the current economic growth cycle.

Consumer spending, the largest component of US economic growth which comprises approximately two-thirds of the US economy, increased at a 2.8% annualize pace in the fourth quarter. While this is lower than the 3.5% growth rate in the third quarter and the 3.8% rate reported in the second quarter it still represents a solid growth rate. This reduced the fears of some economists who were concerned that household spending could have been much weaker given the sharp decline in retail sales reported in the December. Household spending benefitted from a 5.9% increase in durable goods (goods expected to last longer than a year) which may be an indication that US consumers are still willing to purchase high-cost, long-term goods even as consumer sentiment has declined and the labor market has shown some deterioration albeit from very strong levels.

Gross private domestic investment, a category that primarily captures business investment, also increased at a strong pace posting a 4.6% annualized increase for the quarter. However, this notoriously volatile category was down from its 15.2% growth rate in the fourth quarter. The data shows a strong growth rate of 13.1% in intellectual property products which includes patents, copyrights, etc. Conversely, investment in real estate construction declined both on the nonresidential (commercial) side which declined 4.2% and the residential side of the market which declined 3.5%. Residential investment declined for the fourth straight quarter.

The trade gap, the difference between US exports and imports, subtracted 1.1% from US economic growth as imports (subtract from growth) increased 2.7% which exports (add to growth) increased just 1.6%. What stands out is the 7.5% increase in services imports which may be fueled by the strong US dollar which makes foreign travel and other services appear more attractive to US consumers. In addition, it is important to note that both imports and exports increased showing that the uncertainty of the trade war has not negatively impacted US trade data as it did in the third quarter when US exports declined 4.9% while exports increased 10.4%.

Government spending slowed in the fourth quarter to a 0.4% annualized growth rate. This is well below the 2.6% growth rate in the third quarter and 2.5% rate in the second quarter which were buoyed by the federal government spending bills passed in February which increased spending primarily on defense. Federal non-defense spending decreased 5.6% in the fourth quarter.

Going forward government spending and the trade deficit are likely to revert to being a drag on US economic growth. Private investments will likely continue to be volatile adding to GDP in some quarters while detracting from it in others. Therefore, household spending may be the last remaining growth engine for the US economy. If US consumers continue to spend, encouraged by a job market that remains relatively strong and credit markets that are still open for business, the US economy may continue to grow, albeit at a slower pace, in 2019. On the other hand, should consumers pull back and focus on saving or paying down debt at the expense of increased spending, the US economy may struggle to continue its growth trajectory in 2019.  

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