US GDP slows to 2.6% in fourth quarter as consumer spending shoots up

The economy grew 2.3% in 2017, an acceleration from the 1.5% logged in 2016

US economic growth unexpectedly slowed in the fourth quarter as the strongest pace of consumer spending in three years resulted in a surge in imports.

Gross domestic product increased at a 2.6 per cent annual rate also held back by a modest pace of inventory accumulation, the Commerce Department said in its advance fourth-quarter GDP report on Friday.

The economy grew at a 3.2 per cent pace in the third quarter. Economists polled by Reuters had forecast the economy expanding at a 3.0 per cent pace in the final three months of 2017.

A measure of domestic demand jumped at a 4.6 per cent rate, the fastest since the third quarter of 2014, underscoring the economy's strength. Final sales to private domestic purchasers rose at a 2.2 per cent pace in third quarter.

 

Strong domestic demand is part of a synchronised global rebound that includes the euro zone and Asia. Demand has also been buoyed by President Donald Trump's promise of hefty tax cuts, which was fulfilled in December when the Republican-controlled US Congress approved the largest overhaul of the tax code in 30 years.

The economy grew 2.3 per cent in 2017, an acceleration from the 1.5 per cent logged in 2016. Economists expect annual GDP growth will hit the government's 3 per cent target this year, spurred in part by a weak dollar, rising oil prices and strengthening global economy.

While the corporate income tax rate has been slashed to 21 per cent from 35 per cent and taxes for households have also been lowered, economists see only a modest boost to GDP growth as the fiscal stimulus is coming at a time when the economy is almost at full employment.

ROBUST CONSUMER SPENDING

Consumer spending, which accounts for more than two-thirds of US economic activity, increased at a 3.8 per cent rate in the fourth quarter. That was the quickest pace in three years and followed a 2.2 per cent rate of growth in the July-September quarter.

Consumer spending is likely to remain supported by rising household wealth, thanks to the stock market rally and higher house prices, tax cuts and firming wage growth as companies compete for workers and some states raise the minimum wage.

Declining savings, however, are a concern. Savings fell to $384.4 billion from $478.3 billion in the third quarter. The saving rate dropped to 2.6 per cent from 3.3 per cent in the prior period.

The burst in consumer spending was satiated with imports, which grew at a 13.9 per cent pace in the fourth quarter, the fastest since the third quarter of 2010, offsetting a rise in exports, which is being driven by dollar weakness.

Imports subtract from GDP growth.

As a result, trade subtracted 1.13 percentage points from GDP growth last quarter, the most in a year, after adding 0.36 percentage point in the third quarter. Inventory investment also restrained GDP growth in the fourth quarter, subtracting 0.67 percentage point from output after adding 0.79 percentage point to output in the prior period.

With consumer spending accelerating, inflation perked up in the fourth quarter. The Fed's preferred inflation gauge, the personal consumption expenditures (PCE) price index excluding food and energy, rose at a 1.9 percent rate. That was the quickest pace in more than a year and followed a 1.3 per cent pace of increase in the third quarter.

Signs of rising inflation together with a tightening labor market could put the Federal Reserve on a more aggressive path of interest rate increases than is currently being anticipated, economists say. The unemployment rate dropped seven-tenths of percentage point last year to a 17-year low of 4.1 per cent.

The US central bank has forecast three rate hikes this year, the same number as in 2017.

Business investment in equipment grew at an 11.4 per cent rate, the quickest since the third quarter of 2014 and picking up from the third-quarter's 10.8 pe rcent pace. Spending on equipment is likely to be underpinned in 2018 by the corporate income tax cuts and recent gains in crude oil prices.

Investment in homebuilding rebounded after contracting for two straight quarters. Government spending increased at a solid 3.0 per cent, quickening from the July-September period's pedestrian 0.7 per cent growth pace.