Washington: The U.S. economy cooled by less than expected last quarter as business investment picked up, suggesting growth could be stronger for longer as the Federal Reserve takes a patient approach to interest rates.
The 2.6 percent annualized rate of gains in gross domestic product from October to December compared with the 2.2 percent median estimate of economists . It followed a 3.4 percent advance in the prior three months, according to a Commerce Department report Thursday that was delayed a month by the government shutdown.
Consumption, which accounts for the majority of the economy, grew 2.8 percent, slightly below forecasts, while nonresidential business investment accelerated to a 6.2 percent gain on equipment, software and research spending. Government spending slowed, trade was a minor drag and inventories gave GDP a small boost.
The report shows how Republican-backed tax cuts may have continued to aid growth and help bring the full-year figure to 3.1 percent, just above President Donald Trump’s 3 percent goal. While the expansion is poised to become the nation’s longest on record at midyear amid a still-healthy consumer, supportive Fed and robust labor market, the pace could cool amid the trade war, slowing global growth and fading impact of fiscal stimulus.
A separate report Thursday from the Labor Department showed filings for unemployment benefits rose by more than expected last week to 225,000, still near a five-decade low. The week included the Presidents Day holiday, and claims tend to be more volatile around such events.
Growth, while slower than the prior two quarters, remains above both the average pace of the expansion and what the Fed sees as the economy’s long-run potential of 1.9 percent. Still, surveys and gauges such as Treasury yields indicate chances of a recession have increased in recent months while remaining unlikely for 2019.
Excluding the volatile trade and inventories components of GDP, final sales to domestic purchasers increased at a 2.6 percent pace following 2.9 percent. Economists monitor this measure for a better sense of underlying demand.
The increase in consumer spending followed the third quarter’s 3.5 percent gain. It contributed 1.92 percentage points to growth. Drivers included health care, financial services and insurance, and other nondurable goods and services, while spending on food services and accommodations fell.
The GDP data may reinforce analyst criticism of the government’s recent report on December retail sales. That showed the biggest drop in nine years, even as other figures — particularly reports from the country’s largest retailers — indicated consumers continued to open their wallets in the quarter.
Thursday’s report showed the third-quarter slowdown in business spending may have been temporary. Nonresidential fixed investment contributed 0.82 percentage point to growth following 0.35 point in the third quarter. Within that category, spending on structures fell 4.2 percent, the biggest drop in a year, a slowdown that may partly reflect falling oil prices. Business-equipment investment rose 6.7 percent and intellectual property spending jumped 13.1 percent.
Housing remained a weak spot last quarter, posting the fourth consecutive drag on GDP growth, with a contraction of 3.5 percent. Home sales tumbled in late 2018 amid elevated mortgage rates and price increases that continued to outpace wages, though there are signs of demand picking up in early 2019 thanks to a drop in borrowing costs.
Net exports subtracted 0.22 percentage point from GDP growth during the quarter following a 1.99-point reduction in the prior period. The drag reflected a 2.7 percent rise in imports that outpaced a 1.6 percent increase in exports, with the tariff war buffeting both sets of flows.
Inventories added 0.13 percentage point to the pace of expansion.
Meanwhile, inflation remained muted, adding little urgency for the Fed to consider resuming interest-rate hikes. The GDP report showed the Fed’s preferred price index rose at a 1.5 percent annualized pace last quarter, below the central bank’s 2 percent goal. Excluding food and energy, the index rose 1.7 percent.
Government spending increased at a 0.4 percent rate, reflecting a 6.9 percent jump in defense spending — the most in nine years — and a 5.6 percent contraction in non-defense spending, the biggest drop since 2013.
The savings rate rose to 6.7 percent from 6.4 percent in the prior quarter, as inflation-adjusted disposable income rose 4.2 percent, the most in three quarters.
The partial shutdown, which began Dec. 22, had the effect of lowering fourth-quarter GDP growth by about 0.1 percentage point when accounting for the impact of reductions in services provided by the federal government, though the Commerce Department cautioned that the full effects of the shutdown on the economy can’t be quantified.
The first GDP estimate was originally scheduled for release Jan. 30. Thursday’s report encompasses both advance and second estimates. The revised estimate of fourth-quarter GDP is due March 28, data which will also include corporate profits for the period.
GDP q/q primer
Current-dollar estimates are valued in the prices of the period when the transactions occurred—that is, at “market value.” Also referred to as “nominal estimates” or as “current-price estimates.”
Real values are inflation-adjusted estimates—that is, estimates that exclude the effects of price changes.
The gross domestic purchases price index measures the prices of final goods and services purchased by U.S. residents.
The personal consumption expenditure price index measures the prices paid for the goods and services purchased by, or on the behalf of, “persons.”
Profits from current production, referred to as corporate profits with inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj) in the NIPAs, is a measure of the net income of corporations before deducting income taxes that is consistent with the value of goods and services measured in GDP.
The IVA and CCAdj are adjustments that convert inventory withdrawals and depreciation of fixed assets reported on a tax-return, historical-cost basis to the current-cost economic measures used in the national income and product accounts. Profits for domestic industries reflect profits for all corporations located within the within the geographic borders of the United States.
The rest-of-the-world (ROW) component of profits is measured as the difference between profits received from ROW and profits paid to ROW.
Gross domestic product (GDP)
Gross domestic product (GDP) is the value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production. GDP is also equal to the sum of personal consumption expenditures, gross private domestic investment, net exports of goods and services, and government consumption expenditures and gross investment.
Gross domestic income (GDI)
Gross domestic income (GDI) is the sum of incomes earned and costs incurred in the production of GDP. In national economic accounting, GDP and GDI are conceptually equal. In practice, GDP and GDI differ because they are constructed using largely independent source data. Real GDI is calculated by deflating gross domestic income using the GDP price index as the deflator, and is therefore conceptually equivalent to real GDP.
Why Markets Care About GDP q/q
GDP quarterly change (GDP q/q) measures the annualized change in the inflation-adjusted value of all goods and services produced by the economy.
It is released quarterly by the Bureau of Economic Analysis of the Commerce Department about 85 days after the quarter ends
The usual effect is that is ‘Actual’ greater than ‘Forecast’, the report is considered good for the dollar and vice versa.
While this is q/q data, it’s reported in an annualized format (quarterly change x4). There are 3 versions of GDP released a month apart – Advance, Preliminary, and Final. The Advance release is the earliest and thus tends to have the most impact;
BEA releases three vintages of the current quarterly estimate for GDP: “Advance” estimates are released near the end of the first month following the end of the quarter and are based on source data that are incomplete or subject to further revision by the source agency; “second” and “third” estimates are released near the end of the second and third months, respectively, and are based on more detailed and more comprehensive data as they become available.
Gross Domestic Product (GDP) q/q is the broadest measure of economic activity and the primary gauge of the economy’s health.