The U.S. economy downshifted to a 2.6% annualized pace in the fourth quarter, from a 3.4% clip in Q3. Q4’s showing beat market expectations for a 2.1% gain. The U.S. economy grew 2.9% in 2018 as a whole, tying 2015 for the best year for growth since the recession.
Due to the government shutdown, this “initial” estimate of GDP is based on a blend of the source data used in the advance estimate and some of the data used in the second estimate of GDP, therefore, it is less complete than the typical second estimate of GDP.
Consumer spending growth cooled from Q3’s 3.5% to a still-strong 2.8% annualized. Spending on durable goods was quite strong (+5.9%), helped by gains in motor vehicles (+9.2%). Outlays for nondurable goods (+2.8%) and services (+2.4%) cooled, but remained healthy.
Business investment was a pleasant surprise, rising 6.2% in Q4, up from 2.5% in Q3. This positive news came despite a bigger-than-expected decline in structures (-4.2%). Lower oil prices likely weighed on spending in the energy sector. In contrast, outlays for intellectual property jumped up 13.1% thanks to double-digit growth in both software and R&D. Spending on equipment was also healthy, accelerating to a 6.7% pace.
Weakness in residential investment continued in the fourth quarter, contracting 3.6%. Residential investment has declined for four quarters straight, as higher mortgage rates and tax changes weighed on the housing market.
Government spending was softer than expected, rising only 0.4%. Federal spending rose a modest 1.6%, as nondefense expenditures dropped 5.6%, and state and local government spending fell 0.3%. The BEA estimates that the impact of reductions in services provided by the federal government (due to the partial shutdown) subtracted about 0.1 percentage point from real GDP growth in the fourth quarter.
Inventory growth surprised to the upside, contributing positively to headline GDP (+0.1 percentage points).
Exports rose a modest 1.6% after a 4.9% decline in Q3, while imports rose 2.7%. As expected, net exports were a drag on headline GDP (-0.2%-pts).
Key Implications
The U.S. economy had more momentum at the end of 2018 than anticipated. There were pleasant surprises on consumer and business spending. Final domestic demand ran at a 2.6% pace, just a shade off the 2.9% outturn in the third quarter
Yesterday’s victories don’t win today’s ballgames. The economy may have chalked up 3.1% growth in 2018 (Q4/Q4), but high-frequency data indicates that momentum slowed heading into 2019. Some of this weakness was due to the confidence hit from the government shutdown, but not all of it.
We expect growth of slightly better than 2% over the course of 2019, but there are a lot of downside risks out there. It looks like the worst case scenario on the China-U.S. tariff escalation won’t come to pass, but fiscal risks still loom as the year progresses. Overall, Q4’s better-than-expected performance is backward looking and as such is unlikely to move the Fed off its wait-and-see stance.
