Washington: The U.S. economy slowed more than initially thought in the fourth quarter, keeping growth in 2018 below the Trump administration’s 3 percent annual target, and corporate profits failed to rise for the first time in more than two years.
Gross domestic product increased at a 2.2 percent annualized rate, the Commerce Department said on Thursday in its third reading of fourth-quarter GDP growth. That was down from the 2.6 percent pace estimated in February.
The economy grew at a 3.4 percent pace in the third quarter. The expansion will be the longest on record in July.
The revisions to the fourth-quarter GDP reading reflected markdowns to consumer and business spending, as well as government outlays and investment in homebuilding.
For all of 2018, the economy grew 2.9 percent as previously reported, despite the White House’s fiscal stimulus of $1.5 trillion in tax cuts and more government spending. Growth last year was the strongest since 2015 and was an acceleration from the 2.2 percent logged in 2017.
Compared to the fourth quarter of 2017, the economy expanded 3.0 percent, revised down from the 3.1 percent reported last month. President Donald Trump has highlighted the year-on-year growth figure as proof that fiscal stimulus, which has contributed to a swelling of the federal government deficit, has put the economy on a sustainable path of strong growth.
The Commerce Department also said the slower GDP growth compared to the previous quarter reflected decelerations in private inventory investment, consumer spending, and federal government spending and a downturn in state and local government spending.
These movements were partly offset by an upturn in exports and an acceleration in non-residential fixed investment.
Imports, which are a subtraction in the calculation of GDP, also increased less in the fourth quarter than in the third quarter.
The report said real GDP jumped 2.9 percent in full-year 2018 compared with an increase of 2.2 percent in 2017.
Trump likes to showcase the economy as one of the biggest achievements of his term, declaring last July that his administration had “accomplished an economic turnaround of historic proportions.” On the campaign trail, Trump boasted he could boost annual GDP growth to 4 percent, a goal analysts always said was unrealistic given low productivity, among other factors.
Economists polled by Reuters had forecast GDP in the fourth quarter being revised down to a 2.4 percent.
There are signs the slowdown in growth persisted early in the first quarter, with retail sales rising modestly and manufacturing production and homebuilding tepid.
That was underscored by weak profits in the fourth quarter. After tax corporate profits were unchanged for the first time since the third quarter of 2016, after growing at a 3.5 percent rate in the third quarter. A profit measure that corresponds to S&P 500 profits fell $34.2 billion in the fourth quarter.
The economy is facing headwinds from the fading stimulus, slowing global growth, Washington’s trade war with China and uncertainty over Britain’s departure from the European Union.
These contributed to the Federal Reserve’s decision last week to bring its three-year campaign to tighten monetary policy to an abrupt end. The U.S. central bank abandoned projections for any interest rate hikes this year after increasing borrowing costs four times in 2018.
Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 2.5 percent rate in the fourth quarter instead of the previously reported 2.8 percent pace. Consumer spending remains underpinned by a strong labor market.
Growth in business spending on equipment was revised down to a 6.6 percent pace from a 6.7 percent rate. Investment in intellectual products was lowered to a 10.7 percent rate from the 13.1 percent pace reported in February.
Investment in residential construction was revised to show it contracting at 4.7 percent rate instead of at a 3.5 percent rate, marking the fourth straight quarterly decline.
Government investment fell at a 0.4 percent rate, instead of growing at a 0.4 percent pace as previously reported.
But exports were revised up to show them rising at a 1.8 percent pace instead of the 1.6 percent rate reported last month. Imports were revised down, leading to a smaller trade deficit that cut one-tenth of a percentage point from fourth-quarter GDP growth.
The trade deficit was previously estimated to have subtracted 0.22 percentage point from output. Inventories increased at a $96.8 billion rate in the fourth quarter instead of the $97.1 billion reported last month.
Inventory investment added one-tenth of percentage point to GDP growth last quarter as estimated last in February.
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.