- The advance estimate of U.S. Q4 GDP growth was 1.9%, down from 3.5% in Q3 but still marking a slightly ‘above-trend’ pace of growth.
- Net trade was the main source of drag in the quarter, although in part reflecting a reversal of a transitory food-led export gain in Q3. Excluding net trade and inventories, final sales to domestic purchasers rose 2.5%, marking the strongest increase since Q3/15.
Net trade subtracted an outsized 1.7 percentage points from Q4 GDP growth, although in part reflecting a reversal of a transitory jump in Q3 food exports. Overall exports declined by 4.3% in Q4 after jumping 10.0% in Q3. Imports jumped 8.2% in Q4 (the largest increase in 2 years). The import gain was consistent with stronger domestic demand with final sales to domestic buyers rising 2.5%, led by another strong gain in consumer spending (+2.5% in Q4 following a 3.0% increase in Q3), a modestly stronger increase in business investment (+2.4% in Q4 vs 1.4% in Q3) and a 10.2% jump in residential investment following two quarterly declines.
Our Take:
Although slower in Q4 than the increase in Q3, average growth in the second half of the year was nonetheless significantly improved from the disappointing 1.1% average increase in the first half. The composition of growth in Q4 was also, arguably, somewhat better than the Q3 gain. Net trade was somewhat disappointing with the drag in Q4 from that component more-than-retracing a jump in Q3 (much of which reflected a transitory jump in food exports that unwound in Q4); however, the typically more stable final sales to domestic buyers measure rose by its strongest pace in more than a year, in part reflecting a jump in residential investment but also a third consecutive rise in business investment. Early data on capital goods shipments released separately this morning point to the potential for further improvement in Q1 in that latter component. Although much uncertainty about the future of U.S. fiscal policy remains, we continue to expect that underlying economic activity continues to improve at a pace that should be sufficient to allow the Fed to continue hiking interest rates at a modest pace. Our forecast assumes 2 additional 25 basis point hikes to the fed funds target range this year.
