For the third consecutive quarter, U.S. GDP registered a materially higher rate of growth as compared to the expansion average. The breadth of strength is supportive to our outlook for 3 percent GDP growth in 2018.
2017 Ends on a Solid Note
The first look at fourth quarter U.S. real GDP maintained a healthy, abovetrend annualized rate of growth at 2.6 percent (2.3 percent for full year 2017). Admittedly below expectations, the miss was primarily due to the drags from trade and inventories, not from a reduction in consumer or business demand.
Looking at the components, the fourth quarter’s strength was clearly driven by the private sector. Real consumer spending increased at a 3.8 percent annual pace in Q4, coming close to doubling the rate seen in Q3 and consistent with the strength of spending seen during the holiday shopping season. Business fixed investment was also a strong contributor, rising 7.9 percent on the quarter. In particular, accelerated strength in business equipment investment extended for the third straight quarter, rising at a strong 11.4 percent annual pace. Our favorite measure of private sector demand, real final sales to domestic purchasers (GDP less inventories, trade and government spending) increased at a 4.6 percent annual rate, more than double Q3’s pace and its fastest pace since Q2-2014. Residential construction and government spending were also contributors to overall growth, with residential adding for the first time in three quarters.
Tempering fourth quarter’s performance were the collective outsized drags from trade and inventories. On the trade front, improving domestic demand led imports to a robust 13.9 percent gain, more than double the solid 6.9 percent rise in exports. On net, trade subtracted 1.1 percentage points from overall growth in Q4. Inventories nearly reversed its Q3 contribution, subtracting 0.7 percentage points as firms continue to balance shelf content with the pace of sales. Recent survey data have been signaling a pick-up in orders, delays in delivery times and not enough inventories at suppliers. This suggests there is scope for inventories to grow at a steady pace in 2018.
2018 Begins With Promise of More to Come
With the fourth quarter GDP growth performance maintaining an abovetrend pace, we remain confident in our 2018 U.S. real GDP growth call of 3.0 percent. That’s roughly half of a percentage point faster than the expansion average. The strength of private sector demand appears resilient given both the performance of both soft (sentiment surveys) and hard data (sales and orders). Businesses and consumers continue to view their individual situations and the broader economic outlook with "glass half full" perspectives, and when combined with the passage of tax reform, the balance of risk to the outlook may be tilted to the upside. A new Fed leadership regime takes the helm at next week’s FOMC meeting, and investors are eagerly awaiting any changes to the assessment of the U.S. economy and the progress towards achieving monetary policy goals. The Q4 GDP performance does little to alter expectations for a March Fed rate hike.
. Admittedly below expectations, the miss was primarily due to the drags from trade and inventories, not from a reduction in consumer or business demand. ){kind=link}