United States: Economy seen slowing less than expected in Q4
According to an initial estimate of fourth quarter GDP released by the Bureau of Economic Analysis (BEA), the economy continued to soften at the end of 2018, but nevertheless performed better than expected on a robust outturn of business spending. GDP in Q4 rose 2.6% over the previous quarter on a seasonally-adjusted annualized (SAAR) basis, down from 3.4% in the third quarter, but exceeding FocusEconomics panelists’ consensus of 2.4%. In year-on-year terms, the economy grew 3.1% in the last quarter (Q3: +3.0% year-on-year), putting the annual growth for full-year 2018 at 2.9%, a marked acceleration from 2017’s 2.2%. Although the BEA usually releases two GDP estimates, the institute will only release one estimate this quarter due to the month-long delay of the Q4 advance release caused by the government shutdown. Revised data will be released on 28 March.
Zooming in, private consumption growth continued to soften from 3.5% SAAR in Q3 to 2.8% in Q4, due notably to milder service expenditure growth. Private outlays were likely particularly weak towards the end of the quarter reflected in soft holiday retail sales and the effects of the government shutdown. Nevertheless, the print remained robust thanks to a rock-solid labor market which continued to buttress wage growth throughout the quarter. Meanwhile, government spending and investment slowed to just 0.4% in Q4 (Q3: +2.6 SAAR) despite increased national defense spending. This was due to a sharp contraction in federal non-defense spending, likely resulting from the shutdown as well as from a mild decline in state and local government expenditures.
Fixed investment performed robustly overall (Q4: +3.9% SAAR; Q3: +1.1% SAAR), with stronger business spending the star performer following a unimpressive Q3 showing. Particularly, markedly higher spending on intellectual property products and robust investment in equipment led the uptick; spending on structures, however, contracted for the second quarter in a row, which some analysts attributed to weaker crude oil prices in the period causing lower investment in oil rigs. In less positive news, business investment growth was lower in Q4 than in the first half of the year, suggesting that the effects of the tax cut enacted in December 2017 are tapering. Moreover, residential fixed investment contracted for the fourth consecutive quarter, reflecting weakness in the housing market as higher interest rates dampen demand.
Lastly, the external sector was meek in the quarter, as exports of goods and services only grew 1.6% SAAR despite a weak base effect following the 4.9% contraction recorded in Q3. Nevertheless, import growth was also weak at 2.7% (Q3: +9.3%) despite markedly higher service imports.
Commenting on the outlook for Q1, James Knightley, chief international economist at ING, noted:
“Things look to be in decent shape despite the disruption from the government shutdown. Employment growth is strong and wages are accelerating, which should support consumer spending. Equity markets have rebounded sharply, recovering the October-December losses, while gasoline prices remain subdued, helping to boost household real disposable incomes. The trade truce is also a positive development, but obviously a concrete deal in the coming months that would lead to a clear de-escalation of US-China tensions would be ideal”.