The US economy grew 2.1% according to the Bureau of Economic Analysis’ first estimate released on January 30th. This matches the growth rate from the third quarter but is below the 2.5% average growth rate over the past three years. This continues the recent trend of slower than average economic growth. However, the growth rate has remained positive indicating that recessionary pressures may be subdued.
The largest component of US economic growth is personal consumption expenditures – a measurement of household spending. This key data point weakened in the fourth quarter, growing just 1.8%. This is well below the 3.2% growth rate in the third quarter and 4.6% growth rate in the second quarter. The slowdown in consumer spending is evident in both spending on goods and services with the more volatile goods sector weakening sharply from earlier in 2019.
On the other hand, investment spending continues to subtract from economic growth. Investment spending declined 6.1% in the fourth quarter making it three consecutive quarters where investment spending decreased. The primary culprit was business investment which has decreased recently. Meanwhile, residential investment increased during the past six months after an 18-month period of contraction in residential investment.
Perhaps the biggest surprise from the economic growth report was the 8.7% decrease in imports during the fourth quarter. This combined with a 1.4% increase in exports gave the US a more than 10% decrease in the trade deficit for the quarter. While a reduced trade deficit is technically additive to US economic growth it is concerning that the surplus was a result of stagnant exports combined with a sharp decrease in imports. In other words, the benefit came from US companies buying less from abroad rather than selling more to foreign businesses and customers.
Finally, government spending and investment increased 2.7% in the fourth quarter. The bulk of the growth came from a 3.6% increase in federal government spending which was supported by a 4.9% increase in national defense spending. This increase in government spending is not a surprise given the nearly $1 trillion deficit.
Going forward it is expected that investment will remain weak as many businesses have opted to buy back their stock or pay down debt rather than invest for growth. Despite the strong trade numbers in the fourth quarter it is expected that trade will revert to its typical trade deficit once the impact of the Coronavirus has passed and the US-China trade deal is implemented. This will put an emphasis on consumer and government spending in future quarters. Given the budget proposal recently released by the White House, the pace of federal government deficit spending may continue in future quarters. However, government spending alone will not be enough to keep the US economy growing.
This will make consumer spending the key to continued economic growth. Consumer spending accounts for roughly two-thirds of the US economy. Therefore, if consumers remain confident and the job market continues to be strong, consumer spending may continue to grow at a rate that will allow the US to continue to report a moderate but positive economic growth rate.