U.S. GDP grew 1.9% in Fourth Quarter 2016

U.S. GDP grew 1.9% in Fourth Quarter 2016

The U.S. economy decelerated in the final three months of 2016, returning to the familiar pace of growth that has marked the long but lackluster postrecession expansion

Gross domestic product, a broad measure of the goods and services produced across the economy, expanded at an inflation and seasonally adjusted annual rate of 1.9% in the fourth quarter, the Commerce Department said on January 27, 2017. That was a slowdown from the third quarter’s 3.5% growth rate, which had been the strongest reading in two years.

Economists surveyed by The Wall Street Journal had expected a 2.2 % growth rate in the final three months of 2016.

The economy’s expansion last quarter reflected decent consumer spending, a rebound for home-building and stronger business investment in both new equipment and research-and-development projects.

Two volatile categories buffeted the headline growth figure: Private inventories contributed a full percentage point to the fourth quarter’s growth rate, but a wider trade deficit subtracted 1.7 percentage points.

Tab 1

Economic output also rose 1.9 % in the fourth quarter compared with a year earlier, matching its growth during 2015 and close to the 2.1 % average annual growth rate since the recession ended in mid-2009. The current expansion has lasted longer than the historical average, but its average rate has been the weakest since at least 1949.

That unspectacular trend may continue in the coming years. The nonpartisan Congressional Budget Office this week projected GDP would grow 2.3 % in 2017 and 1.9 % in 2018. The agency said structural trends, including baby-boomer retirements, are driving a slowdown in economic growth compared with past decades.

Nick Fanandakis, DuPont Co.’s chief financial officer, told analysts Tuesday that the chemicals company expects stronger U.S. growth in the coming year, “but we remain cautious amid economic uncertainty and the stronger dollar.” A strong dollar can hurt manufacturers by making U.S. exports more expensive for foreign customers.

President Donald Trump, who took office this month, has set a goal of generating 4% annual growth by overhauling the tax code and rolling back federal regulations, among other measures. Some forecasters have raised their projections for U.S. growth this year and in 2018 in anticipation of tax cuts and infrastructure spending.

“We look at the talk of stimulus with some anticipation of a positive boost to the economy,” Texas Instruments Inc. CFO Kevin March told analysts this week. “But frankly we think it’s probably too early to figure out what that might be and how it might manifest itself.”

Economists have warned it will be difficult to significantly boost the economy’s sustainable growth rate due to projected slow growth in the size of the workforce and the recent sluggish trend for labour productivity.

Economic growth “has been restrained in recent years by a variety of forces depressing both supply and demand, including slow labour force and productivity growth, weak growth abroad and lingering headwinds from the financial crisis,” Federal Reserve Chairwoman Janet Yellen said last week. “Although I am cautiously optimistic that some of these forces will abate over time, I anticipate that they will continue to restrain overall growth over the medium term. ”But in the short term, GDP growth fluctuates from quarter to quarter due to changes in household outlays, government spending, trade patterns and other factors.

Tab 2

The report showed consumer spending, which accounts for more than two-thirds of overall economic activity, rose at a 2.5 % annual rate in the fourth quarter compared with 3.0% growth in the third quarter. Outlays were led last quarter by a 10.9 % growth rate for spending on durable goods such as automobiles, the third straight quarter of strong growth in the category.

Business investment continued to pick up in late 2016. Fixed non-residential investment increased at a 2.4 % annual pace in the final three months of the year, the third consecutive quarter of growth. Companies pulled back last quarter on structures spending, but ramped up expenditures on equipment and intellectual property products like software and R&D.

Net exports subtracted 1.7 percentage points from the fourth quarter’s GDP growth rate, reflecting a drop in exports and a large rise in imports. It was the largest trade-related drag on overall growth since the second quarter of 2010. A temporary surge in soybean exports during the third quarter had helped narrow the overall trade gap, and net exports boosted the headline GDP growth rate that quarter by 0.85 percentage point.

The housing sector rebounded last quarter, with residential investment growing at a 10.2% annual pace following two straight quarters of decline. Mortgage rates remain low but have risen in recent months, posing a potential headwind for buyer demand in 2017.

Government spending supported growth in late 2016, rising at a 1.2 % pace in the fourth quarter. The federal government reduced military spending compared with the third quarter, but state and local governments ramped up their investment spending.

Private inventories added 1.0 percentage point to last quarter’s GDP growth rate, after contributing 0.49 percentage point to the third quarter’s growth rate. Previously, inventories had been a drag on growth for five consecutive quarters.

Inflation picked up in the fourth quarter, partly reflecting the recent rise in gasoline prices. The Fed’s preferred price gauge, the personal consumption expenditures price index, rose an annualized 2.2 % in the fourth quarter. Excluding the often volatile categories of food and energy, so-called core prices rose at a more modest 1.3 % pace.

The Fed has set a goal of 2 % annual inflation, and the U.S. central bank said in mid-December it expected long-subdued U.S. price growth would firm to that level “over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labour market strengthens further.”


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