United States: Economic growth stabilizes in the fourth quarter
Economic growth was stable in the fourth quarter from the third, with GDP growth again clocking in at 2.1% in seasonally-adjusted annualized terms (SAAR), according to an advance GDP estimate released by the Bureau of Economic Analysis. The result was a notch better than market expectations of 2.0% growth. Meanwhile, in annual terms, GDP grew 2.3% in Q4, accelerating from 2.1% in Q3. Overall, GDP expanded 2.3% in 2019, which was down from 2.9% in 2018 and marked a three-year low.
Stable growth at the end of 2019 was largely the result of an improvement in the external sector and stronger public outlays offset by a larger inventory drawdown and weaker consumer spending. On the upside, government consumption growth accelerated to 2.7% SAAR on stronger federal, and state and local public spending. Notably, national defense spending rose robustly. On another positive note, the decline in non-residential business investment softened (Q4: -1.5% SAAR; Q3: -2.3% SAAR), on the back of stronger investment in intellectual property products and a weaker downturn in equipment investment. Furthermore, the recovery in residential investment gathered pace in the fourth quarter, hitting a two-year high. On the downside, personal consumption expenditures moderated significantly in Q4 (Q4: +1.8% SAAR; Q3: +3.2% SAAR), owing to a considerable slowdown in purchasing of durable goods. Moreover, a private inventory drawdown subtracted 1.1 percentage points from growth in the quarter after having a negligible impact on growth in Q3.
On the external side, growth in exports of goods and services accelerated to 1.4% SAAR in Q4 from 0.9% in Q3, chiefly on a sharp rebound in exports of services; in contrast, exports of goods declined. Meanwhile, imports of goods and services shrank at the sharpest rate since Q2 2009 on plunging imports of goods. As a result, the external sector added 1.5 percentage points to headline growth (Q3: -0.1 percentage points), marking the largest contribution to growth in over a decade.
This year, the economy is expected to settle into a softer growth track. Consumers were largely responsible for sustained momentum throughout 2019, and the slowdown in household spending in Q4 could be a harbinger for things to come in 2020. Although the labor market is rock solid, job and wage gains are likely to slow this year. Moreover, business investment will likely remain lackluster in the face of a still-weak global backdrop and lingering trade tensions as U.S. tariffs on Chinese goods are still largely in place. Finally, fiscal stimulus from the 2017 tax cuts have faded and should not provide any impetus to growth this year.
Delving deeper into the outlook for investment, analysts at Nomura noted:
“While we continue to expect modest acceleration in equipment investment growth by H2 2020, ongoing downside risks bear monitoring. In Q1, we expect a modest boost from investment in autos as GM production continues to normalize. However, Boeing’s suspension of their 737 Max production in January should weigh on transportation equipment spending and private inventories in the near term.”