Manufacturing Getty

US GDP Grows Below-Forecast 2.6% on Trade, Inventory Drags

“This is far from doom and gloom. Businesses are investing aggressively and consumers continue to spend at a very strong pace. We got a bit spoiled by 3%-plus growth in the last couple of quarters, but that streak was eventually going to come to an end.”

The U.S. economy expanded at a slower-than-projected pace in the fourth quarter on drags from trade and inventories, offsetting strength in consumer spending and business investment that signals solid momentum entering 2018.

Gross domestic product rose at a 2.6% annualized rate after 3.2% in the prior period, Commerce Department data showed on Jan. 26.

Consumer spending, the biggest part of the economy, rose 3.8%, the best in more than a year.

Business equipment investment grew at the fastest pace in three years.

While the report dashed expectations for the longest streak of 3%-or-better growth since 2005, a key measure of underlying demand delivered the strongest performance since 2014 and inflation picked up, which will help keep the Federal Reserve on track to raise interest rates in coming months.

President  Donald Trump’s move to cut taxes may give the economy an additional boost in 2018, though reaching his goal of sustained 3% GDP growth will prove challenging, in part because household purchases are projected to cool.

Weak productivity and slow labor-force expansion will also pose hurdles in the longer term, and higher borrowing costs could crimp gains as well.

“The economy continues to hum along,” said Ryan Sweet, an economist at Moody’s Analytics Inc., who accurately projected the 2.6 percent figure.

“This is far from doom and gloom. Businesses are investing aggressively and consumers continue to spend at a very strong pace. We got a bit spoiled by 3%-plus growth in the last couple of quarters, but that streak was eventually going to come to an end.”

 Fourth-quarter GDP was dragged down mainly because the trade deficit widened, as imports rose at double the pace of exports. Net exports subtracted 1.13 percentage points from GDP growth, the most in a year. A change in inventories subtracted 0.67 percentage point, the most since early 2017. A separate report on Jan. 26 showed that the nation’s merchandise-trade gap widened in December to the biggest since 2008.

Underlying Demand

For a better sense of underlying domestic demand, economists look at final sales to domestic purchasers, which strip out inventories and trade, the two most volatile components of GDP. Such sales grew 4.3% last quarter, the most since 2014, after a 1.9% increase.

For the full year, GDP, the value of all goods and services produced, grew 2.5% in the fourth quarter from a year earlier, the Commerce Department report also showed. On that basis, it was the strongest annual performance since 2014’s 2.7%. The expansion is now in its ninth year and is poised to become the country’s second-longest on record later in 2018.

By Shobhana Chandra

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