In the fourth quarter, the U.S. economy grew at an annualized pace of just 2.6 percent. The results missed the financial market’s estimate of 2.9 percent and were well below the second and third quarters’ impressive growth rates of 3.1 percent and 3.2 percent, respectively.
So, have the wheels already fallen off the current economic bus of growth and expansion? Has the economic resurgence we witnessed in the second and third quarters of 2017 already come to an end?
Simply stated – No. Despite the disappointing headline 2.6 percent growth rate, the latest economic report confirmed the American economy is cruising along just fine. Let’s take a closer look.
Released each month by the U.S. Department of Commerce, the latest Gross Domestic Product report provided the first glimpse into the U.S. economy’s performance during the fourth quarter, which includes the retail holiday shopping season. GDP represents the total dollar value of goods and services produced by the U.S. and serves as the key indicator on the health of the American economy. Quality GDP growth reflects a strong and vibrant economy.
A deeper dive into the latest GDP report shows why the fourth quarter results were actually quite strong. Much of the decline in the growth rate was caused by a widening of the nation’s trade deficit combined with a sudden decline of business inventories. Yes, these have a legitimate impact on economic growth and shouldn’t be discounted. But the key driver of the American economy is consumer spending. In fact, it accounts for more than two-thirds of all economic growth and activity in our country. And in the fourth quarter, spending by both American consumers and businesses continued to surge.
Consumer spending consists of the household purchases of durable and non-durable goods and services such as cars, furniture, food and clothing, among others. In the fourth quarter, consumer spending grew at an annualized rate of 3.8 percent, its fastest pace in more than a year and above the third quarter’s rate of 2.2 percent. Durable goods, purchases expected to last at least three years, increased by 8.2 percent, its strongest growth in nearly 12 years. Residential housing, though not considered a part of consumer spending data, gained 11.6 percent after back-to-back quarters of declining growth.
But the rising star of U.S. economic spending continues to be business investment — the big-ticket purchases of buildings, equipment and intellectual property, such as software and research and development. In the fourth quarter, business investment gained a hefty 6.8 percent, which included an 11.4 percent surge in the purchase of equipment. The growth in equipment is the largest in more than three years. In 2017, business investment grew by 6.5 percent compared to just 0.73 percent growth in 2016.
The question is, will this economic strength continue into 2018, and if so, to what extent?
The U.S. economy does enter 2018 with momentum, with a stellar 2.97 percent economic growth rate in the last three quarters. President Trump has vowed a sustainable economic growth rate above 3 percent. This would be a sizable boost from the economy’s tepid 8-year average growth rate of just 2.1 percent. In fact, the last time the U.S. economy had a full calendar year of 3-plus percent growth was 2005.
Whether the U.S. economy can maintain a 3 percent growth rate will remain to be seen. The economy’s fundamentals remain strong — low unemployment, low inflation, robust consumer and business spending and a resurgence in the greater global economy. President Trump’s recently signed corporate and personal tax cuts are expected to further boost economic growth. In all, the supporting evidence gave the Federal Reserve enough confidence to upgrade its economic outlook for the next three years. The fourth quarter results were far from disappointing. Indeed, they were just what the financial markets were looking for.