Output Growth Holds Steady but Details Look Soft – Robert Hughes (02/03/2020)

Real gross domestic product rose at a 2.1 percent annualized rate in the fourth quarter, the same pace as in the third quarter, according to the Bureau of Economic Analysis. Measured from fourth quarter 2018 to fourth quarter 2019, real gross domestic product increased 2.3 percent versus 2.5 percent for the four quarters of 2018 (see bottom chart). For calendar year 2019, real gross domestic product grew 2.3 percent, the slowest pace since 2013. Growth in the fourth quarter was driven by gains in consumer spending, government, and a sharp drop in imports which are used in the calculation of real gross domestic product. Exports and residential investment made small contributions while inventory accumulation and business investment posted small declines. Consumer-price increases accelerated in the fourth quarter versus the prior quarter though consumer prices excluding food and energy decelerated. Overall, the report suggests the U.S. economy continues to expand at a modest pace and remains highly dependent on consumers.

Consumer spending decelerated in the fourth quarter, rising at a 1.8 percent pace following robust gains of 3.2 percent and 4.6 percent in the third and second quarters, respectively. The deceleration was broad-based with durable-goods spending up 2.1 percent versus 8.1 percent in the third quarter, nondurable-goods spending up 0.8 percent versus 3.9 percent, and services gaining 2.0 percent versus 2.2 percent previously. Consumer spending contributed 1.2 percentage points of the 2.1 percent real-gross domestic product growth rate (see top chart).

Business fixed investment fell at a 1.5 percent annualized rate in the fourth quarter, the third quarterly decline in a row. At annualized rates, the decline was led by a 10.1 percent fall in spending on structures while spending on equipment declined at a 2.9 percent annual pace, the third drop in the last four quarters. Investment in intellectual property rose 5.9 percent following a 4.7 percent pace in the third quarter; the gain extends to 12, the number of consecutive quarterly increases in investment in intellectual property products. Overall, real business investment subtracted 0.20 percentage points from real gross domestic product growth versus a 0.31 percentage-point reduction in the third quarter (see top chart).

Residential investment, or housing, rose at a 5.8 percent pace in the fourth quarter compared to a 4.6 percent pace in the prior quarter. Housing has risen for two consecutive quarters following declines over the prior six quarters and eight of the last nine quarters. Residential investment added 0.21 percentage points to real gross domestic product growth in the fourth quarter (see top chart). Despite the recent gains, residential investment may not contribute significantly to future growth as the inventory of new homes for sale rises and the months’ supply hits multiyear highs.

Inventory accumulation by businesses continued in the fourth quarter but at a sharply slower pace compared to the third quarter, subtracting 1.09 percentage points from fourth-quarter growth (see top chart).

Net trade had a large positive impact on the calculation of real gross domestic product growth in the fourth quarter, adding 1.48 percentage points. Real exports rose at a 1.4 percent pace, adding 0.17 percentage points to overall growth (see top chart) while real imports declined at an 8.7 percent rate, adding a whopping 1.32 percentage points (see top chart) in the calculation of real gross domestic product. Trade patterns are likely being distorted by disruptions to trade policy, current and threatened, suggesting the significant contribution from declining imports is unlikely to be repeated.

Government spending rose at a 2.7 percent annualized rate in the fourth quarter compared to a 1.7 percent increase in the third quarter, contributing 0.47 percentage points to growth versus a 0.30 percentage-point contribution in the prior quarter (see top chart). Federal defense spending rose 4.9 percent while federal nondefense spending rose 1.6 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 meager 1.4 percent annualized rate in the fourth quarter, down from a 2.3 percent pace in the third quarter. The fourth-quarter gain was the slowest pace since 2015 (see bottom chart). Over the last four quarters, the pace of growth was 2.2 percent, matching the third quarter pace and the slowest since 2013 (see bottom chart).

On the prices side, consumer prices — the personal-consumption-expenditures price index — rose at a 1.6 percent pace in the fourth quarter, slightly faster than the 1.5 percent pace in the third quarter. Over the past four quarters, the increase is 1.5 percent. For core consumer prices, which exclude volatile food and energy components, the index rose 1.3 percent, down from 2.1 percent in the prior quarter. Over the last four quarters, core consumer prices rose 1.6 percent versus 1.9 percent in the prior quarter. Core consumer-price increases are running under 2 percent and appear unlikely to accelerate dramatically in the quarters ahead.

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