Home Economic Trends Real GDP Growth Decelerated in the Fourth Quarter, but Domestic Demand Remains...

Real GDP Growth Decelerated in the Fourth Quarter, but Domestic Demand Remains Robust – Robert Hughes (03/04/2019)

Real gross domestic product rose at a 2.6 percent annualized rate in the fourth quarter, down from a 3.4 percent pace in the third quarter, according to the Bureau of Economic Analysis. Measured from fourth quarter 2017 to fourth quarter 2018, real GDP increased 3.1 percent (see chart). For calendar year 2018, real GDP grew 2.9 percent, the highest since 2015. Growth in the fourth quarter was driven primarily by solid gains in consumer spending and business investment. Inventory accumulation and government spending made small contributions offset by small declines in trade and housing. Consumer-price increases decelerated in the fourth quarter versus the prior quarter. Overall, the report suggests the U.S. economic expansion remains on track.

Consumer spending decelerated in the fourth quarter, rising at a 2.8 percent pace following robust gains of 3.5 percent and 3.8 percent in the third and second quarters, respectively. The deceleration was concentrated in nondurable-goods spending, up 2.8 percent versus 4.6 percent in the third quarter, and services, gaining 2.4 percent versus 3.2 percent previously. Durable-goods spending rose 5.9 percent versus 3.7 percent in the prior quarter, led by strong gains in motor vehicles (up 9.1 percent), recreational goods (up 7.8 percent), and other goods (up 8.7 percent). Consumer spending contributed 1.9 percentage points of the 2.6 percent real-GDP growth rate.

Business fixed investment rose at a 6.2 percent annualized rate in the fourth quarter, more than double the 2.5 percent pace of the third quarter. At annualized rates, the gain was led by a 13.1 percent jump in intellectual property spending while spending on equipment rose 6.7 percent. Investment spending on structures fell 4.2 percent following a 3.4 percent fall in the third quarter and two quarters of double-digit growth in the first half of 2018. Real business investment contributed 0.82 percentage points to overall real GDP growth versus a 0.35 percentage-point contribution in the third quarter.

Residential investment, or housing, fell at a 3.5 percent pace in the fourth quarter compared to a 3.6 percent decline in the prior quarter. Housing has declined in six of the past seven quarters and continues to face a challenging environment, with rising interest rates and elevated home prices dragging down affordability.

Inventory accumulation by businesses continued in the fourth quarter, adding 0.13 percentage points to fourth-quarter growth after adding 2.33 percentage points in the prior quarter. Net trade had a negative impact on overall GDP growth in the fourth quarter, subtracting 0.22 percentage points. Exports rose at a 1.6 percent pace while imports grew at a 2.7 percent rate. Trade patterns are likely being distorted by disruptions to trade policy, current and threatened. Less uncertainty surrounding trade policy would be a positive for the economy overall.

Government spending rose at a 0.4 percent annualized rate in the fourth quarter compared to a 2.6 percent increase in the third quarter, contributing 0.07 percentage points to growth versus a 0.44 percentage-point contribution in the prior quarter. Federal defense spending rose 6.9 percent while federal nondefense spending fell 5.6 percent. Exploding federal deficits remain one of the most significant risks to the medium- and long-term outlook for the economy.

Real final sales to private domestic purchasers, a key measure of private domestic demand, rose at a very healthy 3.1 percent annualized rate in the fourth quarter, up slightly from a 3.0 percent pace in the third quarter. The fourth-quarter gain was the sixth time in the past eight quarters that growth met or exceeded 3 percent.

Despite the distortions from the government shutdown and elevated uncertainty surrounding trade policy and global economic conditions, the underlying trend in real private domestic demand remains well-supported by continued job creation, rising wages, healthy corporate and consumer balance sheets, solid corporate-sales and corporate-earnings growth, and high levels of business and consumer confidence. The virtuous cycle between the consumer and corporate sectors is likely to provide ongoing support for further gains in real private domestic demand, suggesting continued economic expansion in the months and quarters ahead.

On the prices side, consumer prices — the personal-consumption-expenditures price index — rose at a 1.5 percent pace in the fourth quarter, slower than the 1.6 percent pace in the third quarter. The rate of increase in the personal-consumption-expenditures price index has decelerated for four consecutive quarters (see bottom chart). Over the past four quarters, the increase is 1.9 percent. For core consumer prices, which exclude volatile food and energy components, the index rose 1.7 percent, up from 1.6 percent in the prior quarter. Over the last four quarters, core consumer prices rose 1.9 percent. Core consumer-price increases have stabilized at just under 2 percent and appear unlikely to accelerate dramatically in the quarters ahead.