U.S. real GDP grew by 1.9% (annualized) in the fourth quarter according to the advance estimate, falling short of the median consensus estimate of 2.2%.
U.S. consumers, however, did not disappoint. Spending grew 2.5% (matching the median forecast for 2.5%), as spending on durable goods poster a third consecutive stellar quarter (10.9%). Spending on services was relatively weak, advancing only 1.3%, which was in part due to unseasonably warm weather depressing utility consumption.
Non-residential business investment accelerated in the fourth quarter. Total business spending grew 2.4%, as spending on equipment investment (3.1%) and intellectual property (+6.4%) outweighed a drop in structures (-5.0%).
Residential investment was also up a hearty 10.2%, after declining in the previous two quarters.
As expected, net-exports exerted a considerable drag on growth in the fourth quarter. Exports fell 4.3%, after jumping 10% in the third quarter, on a one time surge in soybean exports. More surprising was the 8.3% surge in imports. In total, net exports subtracted 1.7%-points from growth, after adding 0.9%-points in the third quarter.
Inventory investment was another big contributor to the headline, adding 1.0%-point.
Key Implications
While the fourth quarter growth headline came in short of expectations, much of the weakness stemmed from a larger-than-expected rebound in imports. The details on domestic demand were much stronger. Final domestic demand was up 2.5%, a step up from 2.1% in the previous quarter. Domestic demand is a better predictor of future growth than headline GDP, and the strength augurs well for the next year. Moreover, this estimate of GDP growth relies on incomplete information. There has been a consistent pattern of upward revisions to growth estimates over the past year, so this is not the final word on fourth quarter growth.
With all of 2016 now on the books, the economy grew by a modest 1.6% on an annual average basis, a step down from its 2.6% pace in 2015. However, this reflects a disappointing first half of the year. Looking at growth on a year-end to year-end basis, the U.S. economy grew by 1.9%, just slightly above the 2015 clip. We expect growth to accelerate above the 2.0% mark over the next year, supported by ongoing consumer spending growth and a firm rebound in business investment.
Today’s report continues to show a U.S. economy that is still taking up economic slack, and warrants a gradual pace of rate hikes by the Fed. The Fed’s preferred inflation measure was up a tame 1.3% in the fourth quarter, underscoring why the Fed can afford to be patient on rate hikes. In our recent Dollars & Sense publication, we outline that we expect the Fed to raise rates twice over the next year, raising its key policy rate every six months or so.
