The U.S. economy closed out the final quarter of last year with slower economic growth compared to prior periods, according to a federal report Friday.
President Donald Trump has promised to help both the business community and workers through economic growth. He has looked towards regulatory and tax reform to accomplish those goals with his agenda prompting optimism in the economy. But last year ended with slower economic growth than seen in previous quarters.
The Gross Domestic Product (GDP) tracks the total dollar value of all goods and services produced over a specific time period. The GDP is commonly used to determine the economic performance of a country or region. The Bureau of Economic Analysis (BEA) found it increased at an annual rate of 2.6 percent in the fourth quarter of 2017.
“It’s not a spectacular report, but I don’t read a lot into the decline,” Peterson Institute senior fellow Jacob Kirkegaard told InsideSources. “In fact, I would say that there is a pretty good chance that this number will be revised upwards when the final numbers are published later in the year.”
The GDP for the third quarter of last year increased by 3.2 percent while the second quarter saw a 3.1 percent increase. Trump didn’t have the best first quarter either with economic growth coming it at 1.4 percent. Steven Kyle, an associate professor at the Cornell Dyson School of Applied Economics, adds the newest report was still pretty good.
“The reason it was below three is that imports were higher than anyone expected them to be,” Kyle told InsideSources. “But at the same time consumer spending, which is 70 percent of the total, was really strong. That means we should have no expectations of weakness going forward because consumers are out there and buying stuff.”
Kyle adds that another positive sign is that consumer indebtedness – debt owed by consumers as opposed to businesses or governments – is at a near record low. Kirkegaard notes some underlying indicators actually show the potential for future economic growth.
“The numbers are coming in at 2.6, which is obviously below three percent,” Kirkegaard said. “But at the same time, the reason for that is reduced inventory investments. That should be a good indicator of future growth. So the decline, I don’t really read much into it from a macroeconomic point of view.”
IHS Markit senior economist Ben Herzon found that final sales were solid, but inventory investment came up short from tracking estimates. He adds that this might imply more of an increase in inventory investment in the first quarter of this year, which would raise the tracking forecast for the beginning of the year.
“The strength in Q4 GDP growth can be attributed to strong final sales to domestic purchasers (+4.3%), including strong personal spending growth (+3.8%),” Herzon said in a statement provided to InsideSources. “The Q4 number came in below our tracking estimate mainly due to a sharp fall in inventory investment that subtracted seven-tenths from GDP growth; we had expected a smaller decline.”
President Trump has promised to increase economic growth in ways his predecessor, former President Barack Obama, could not – by keeping the growth rate at above three percent or higher. Obama did achieve over three percent periodically but never managed to hold it. Kirkegaard adds that while the report is okay, the political repercussions could potentially be more notable.
“The political effect I think will be large in the sense that, obviously, Trump doesn’t get the opportunity to say that he has three-quarters of above three percent growth,” Kirkegaard said.
Kirkegaard adds that the latest numbers bring down the overall yearly average as well – though it is still in line with earlier predictions. He notes the political perceptions could potentially hurt certain markets like stocks. Ordinary retail investors could fuel that since they are more sensitive to perceptions than professional investors are.
The GDP growth rate has struggled over the last decade following a severe economic downturn, known as the Great Recession. The recession was sparked by the subprime mortgage crisis and the financial crisis of 2007. It was followed by an unusually sluggish recovery which still persists to an extent. Obama was still in office when the recovery started to finally pick up steam in the last few years.
“What I would say going forward is, looking to see if consumer spending remains as strong as it has been,” Kyle said. “I would also look at residential investments, single-family homes hit a crater with the housing bust and so that market is pretty tight. I would expect that to be good.”
Kyle adds the new construction also helps to drive economic growth. He also notes that residential investments are usually a leading indicator of the business cycle. Residential investments will likely be one of the first indicators trending down when the economy reaches the peak of the business cycle.
President Trump and congressional leaders were able to pass a law that overhauls the tax code despite opposition from lawmakers on the left. The tax plan does a lot to lower taxes with a particular focus on corporate and business rates. Kirkegaard adds the tax law was clearly written with the intent of bringing as much investment forward as possible.
“I think the big thing we should be looking for in upcoming reports is the nonresidential private investments,” Kirkegaard said. “Basically, corporate investments. That is, basically, the indicator that will decide whether or not the tax breaks passed by the Republicans will have the effect that they said they would or not.”
Moody’s Analytics expects the impact of the tax reform law to start happening soon. The law took effect at the start of the year and there have already been promising signs like companies providing bonuses and raises. The more long-term economic impact should become clearer in future reports.
“The U.S. economy is strong and, with deficit-financed tax cuts kicking in, expansion should soon pick up further,” Moody’s Analytics senior director Scott Hoyt said in comments provided to InsideSources. “There is a general sense of economic euphoria, with global investors bidding up asset prices for everything from stocks to commercial real estate. Businesses and consumers are also about as upbeat as they ever get. In most times, sentiment reflects but does not drive economic and financial conditions.”
The BEA report also found that personal incomes increased by $178.9 billion in the fourth quarter – compared with an increase of $112.3 billion in the third. The report notes that this acceleration in personal income primarily reflects an upturn in personal interest income and an increase in nonfarm proprietors’ income.
The BEA report reflects the advanced findings for the fourth quarter of last year. The report is based on source data that is incomplete or subject to further revisions. That means the finalized numbers could be different. The finalized fourth-quarter report is scheduled to be released on March 28.
“This is an advanced report and they usually get revised,” Kyle said. “So until we get another take on this, I personally wouldn’t obsess about another after the decimal point. It can go up a bit, it can go down a bit.”