United States: Advance Q4 GDP estimate falls short of expectations but points to an economy in good shape
January 26, 2018
An advance GDP estimate shows the U.S. economy continued to expand at a healthy pace in the fourth quarter of last year on the back of solid consumer spending and resilient business capital expenditure growth. GDP rose 2.6% in seasonally-adjusted annualized (SAAR) terms in Q4, which marked a deceleration from the 3.2% expansion recorded in the previous quarter. The headline figure fell short of market expectations of 2.9% growth, with softness in the external sector accounting for most of the quarter’s miss. On a year-on-year basis, GDP growth rose from 2.3% in Q3 to 2.5% in Q4, the highest figure in two and a half years.
The headline print obscured some of the strength evident in the Q4 report. Notably, the domestic sector performed brilliantly throughout the quarter, with solid performances seen across components. Household spending benefitted from replacement demand following the late-summer hurricanes, a very tight labor market and buoyant housing prices. Private consumption rose 3.8% in SAAR terms in Q4, well above the 2.2% increase recorded in Q3 and the joint-highest expansion since Q4 2014. Purchases of durable goods rose a very solid 14.2% in Q4, up from the 8.6% increase recorded in the previous quarter, while non-durable goods also performed solidly on hurricane-induced restocking operations.
Residential fixed investment, another consumer-related component, rebounded markedly in Q4 to a 11.6% expansion following two quarters of contractions (Q3: -4.7% SAAR). On a similar note, double-digit growth in equipment investment and resilient intellectual property spending buttressed non-residential capital outlays through the quarter. Amid soaring confidence levels and still-low borrowing costs, business fixed investment rose 6.8% in Q4, above the 4.7% increase recorded in the previous quarter. Inventories, however, dragged on headline growth, subtracting 0.7 percentage points from the headline figure. In Q3, inventories added 0.8 percentage points to growth.
On the back of a domestic economy running at full speed, imports rebounded from a 0.7% contraction in SAAR terms in Q3 to a 13.9% surge in Q4, the largest increase in more than seven years. Goods imports were particularly strong at a 16.8% increase, while services imports recorded a softer 1.7% expansion. Exports also rose a solid 6.9% in Q4 on the back of a weak dollar, well above the 2.1% increase seen in the previous quarter. However, the stronger pace of import growth over that of export growth meant that the external sector weighed on the economy’s performance in Q4. The sector subtracted 1.1 percentage points from overall growth in Q4, contrasting the 0.4 percentage-point contribution reported in Q3.
The advance fourth-quarter GDP figure was consistent with FocusEconomics panelists’ positive 2018 outlook for the U.S. economy. More importantly, strong momentum observed in the last stretch of 2017 will be compounded this year by the recently approved tax rewrite and likely increases to discretionary spending, which will all provide a further lift to GDP growth.
United States GDP Forecast
The Federal Reserve expects economic growth of 2.5% in 2018 and 2.1% in 2019. FocusEconomics Consensus Forecast panelists are slowly factoring in the tax rewrite and also expect GDP to expand 2.5% next year, which is up 0.1 percentage points from last month’s forecast. For 2019, the panel similarly expects the economy to expand 2.1%.
Author: David Ampudia, Economist