- The updated estimate falls slightly short of market expectations for an upward revision to 2.1%.
- Consumer spending was stronger than previously estimated but that was offset by weaker government spending and business fixed investment.
Consumer spending growth was revised up to 3.0% in the second estimate of Q4/16 GDP from 2.5% previously, now matching the previous quarter’s pace. While 2016 was a strong year for consumer spending, the 2.7% annual increase fell short of the previous two years’ gains. Stronger Q4/16 household expenditure was offset by modest downward revisions elsewhere0most significantly government spending, which is now estimated to have edged up just 0.3%. Business fixed investment was also revised lower; at 1.3% in Q4/16, there is no longer evidence of a meaningful pickup relative to the previous two quarters. With residential investment still showing a near 10% increase, final domestic demand was revised up marginally to 2.6% from 2.5% previously. Net exports remained a significant drag (with an unwind of Q3/16’s surge in food exports a major factor) while a stronger inventory build provided some offset.
Our Take:
Offsetting revisions to Q4/16’s expenditure detail left growth unchanged, and it remains the case that a pickup in domestic spending relative to Q3/16 made for a more encouraging report than the headline GDP figure suggests. The upward revision to consumer spending indicates strong momentum in the household sector toward the end of the year, but a more modest increase in business investment is somewhat discouraging, leaving less evidence of rebalancing in domestic growth toward the end of last year. While the latter trend is less positive than previously estimated, we continue to expect non-residential investment will pick up modestly this year alongside improving business sentiment, supplementing another strong contribution to growth from consumer spending. Our forecast has also built in some fiscal stimulus, though much of the boost to annual growth could fall more in 2018 as indications that tax reform might not come before late-summer limit the scope for an add from fiscal policy this year.
