The economy grew solidly late last year as a modest gain in consumer spending and a narrower trade deficit offset persistently sluggish business investment and stockpiling.
The nation’s gross domestic product – the value of all goods and services produced in the U.S. – increased at a seasonally adjusted annual rate of 2.1% in the October-December period, matching the third quarter pace, the Commerce Department said Thursday. Economists forecast a 2.2% gain.
Consumer spending slowed after six months of brisk growth but continued to serve as the economy’s main engine. Business investment, which has been hobbled by trade fights, feeble growth overseas and resulting weakness in manufacturing, fell for the third straight month.
For all of 2019, the economy throttled back after federal tax cuts and spending increases juiced growth the prior year but still grew a sturdy 2.3%, in line with the modest average throughout the record 10 1/2-year-old expansion. Still, that’s the slowest pace since 2016. In 2018, growth was 2.9%, near President Trump’s target of at least 3%. Yet that seems to have been a high-water mark and Trump appears likely to fall short of his goal of sustaining such advances over several years.
At the same time, the economy performed better than many analysts predicted last year despite a weak global economy and Trump’s trade war with China, which slapped tariffs on $360 billion in Chinese imports.
Developments in recent months brightened the outlook and eased recession fears. The Trump administration reached a “phase 1” trade agreement with China that suspended future tariffs. Congress passed a new trade deal with Canada and Mexico. And the odds of a chaotic British exit from the European Union have declined.
New threats have emerged, however, including the coronavirus in China, U.S.-Iran tensions and Boeing’s suspension of its 737 MAX airliner production after two fatal crashes. Also, Trump’s broader trade battles with China and Europe still loom and some economists worry about growing business uncertainty as the November presidential election draws closer.
Economists surveyed by Wolters Kluwer Blue Chip Economic Indicators project 1.9% growth this year and in 2021 as job growth slows in the latter stages of the expansion.
“The days of 3% growth are in the rear-view mirror, but the American economy should continue to grow around this pace” over the next year says economist James Marple of TD Economics.
Consumer spending rises
Consumer spending slowed more than expected, growing 1.8% in the fourth quarter, down from 4.6% and 3.2% in the prior two periods. While the trade war and recession worries damped Americans’ outlook a bit, households have continued to benefit from solid job gains averaging 176,000 a month last year, healthy wage increases, low debt as a share of income and record stock prices.
Consumption makes up about 70% of economic activity.
“Consumer spending has shown impressive resilience so far this year, and remains the linchpin to continued U.S. economic expansion,” Wells Fargo wrote in a research note before Wednesday’s report.
Trade bolsters growth
A narrower trade gap was a big contributor to growth. U.S. exports rose 1.4%, following a 1% gain in the third quarter while imports tumbled 8.7%, largely because of President Trump’s tariffs on Chinese imports. Although Trump’s tariffs on $360 billion in Chinese products have sparked Chinese counter-tariffs, U.S. imports from China dwarf exports to the country.
This month, the two nations reached a partial trade deal that calls for China to buy more agricultural and other goods from the U.S.
Government outlays increase
Federal, state and local spending increased 2.7%, up from 1.7% in the third quarter. Federal outlays rose 3.6% while state and local increased 2.2%. The White House and Congress last year reached a deal to renew a two-year increase in spending over existing caps by about $300 billion.
Residential investment bounces back
Construction of new single-family homes and apartments, along with renovations, rose 5.8% after a 4.6% increase the prior quarter that broke a string of six straight quarterly declines. Average 30-year fixed mortgage rates have fallen to 3.6% from 4.45% a year ago, sparking home purchases and construction. That has helped offset a shortage of labor and available lots that have constrained builders.
Business investment declines
Business investment fell 1.5%, marking the first time since 2009 such outlays have fallen three straight quarters and at least partly reflecting companies’ dimmer outlook amid the trade conflicts. Spending on structures fell 10.1% while purchases of equipment such as computers and factory equipment dropped 2.9%.
Business stockpiling pulls back
Companies added to inventories at a far slower pace, subtracting more than a percentage point from growth. Many firms beefed up their stocks early last year in a bid to dodge Trump’s tariffs on Chinese imports, reducing the need to replenish those supplies in recent quarters.
Waiting for your tax refund: How long will it take to get my tax refund this year?
Virus fallout:: Businesses restrict travel to China, close stores because of coronavirus as economic fallout spreads