FRIDAY, March 29, 2024
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Trade helps U.S. economy grow 2.1% while consumption slows

Trade helps U.S. economy grow 2.1% while consumption slows

U.S. consumer spending moderated and business investment continued to deteriorate at the end of 2019, while a smaller trade deficit and more home construction helped keep economic growth steady.

Gross domestic product expanded at a 2.1% annualized rate in the October-December period for a second straight quarter, according to Commerce Department data Thursday. The median forecast in a Bloomberg survey of economists called for 2% growth.

Consumer spending decelerated to a 1.8% pace, below projections and the weakest since the first quarter, while a key gauge of prices watched by the Federal Reserve rose less than expected. Nonresidential business investment declined for a third straight period, the longest stretch since the last recession.

Bigger cutbacks in business investment remain a risk if they translate into weaker job gains and slower consumer spending. The suspension of production for Boeing's 737 Max, for one, is set to weigh on the economy at least through the first half.

Nonetheless, healthy job creation, cheap borrowing costs and signs of stabilization in global manufacturing after trade agreements between the U.S. and its biggest trading partners should support the economy as President Donald Trump seeks re-election.

Even so, full-year GDP grew 2.3% in 2019, the slowest of Trump's presidency and below his promised target of 3%. Economists expect growth to further moderate in 2020, as the waning effects of tax cuts and cooling wage gains make achieving that goal difficult in the late-stage expansion.

"The consumer is starting to pull back a bit," said Kevin Cummins, senior U.S. economist at NatWest Markets.

While the Fed has signaled it will hold rates steady barring a major shift in the outlook, further weakness in inflation could spur the Fed to lower interest rates this year after three reductions in 2019, Cummins said.

A closely watched gauge of underlying demand grew at the slowest rate of the year. So-called final sales to domestic purchasers, which exclude the volatile trade and inventories components of GDP, expanded 1.6% in the fourth quarter. Excluding government purchases, final sales advanced just 1.4%, the weakest in four years.

Slower consumption growth is consistent with the message from central bank policymakers. The Fed, in a statement Wednesday at the conclusion of a two-day policy meeting, softened its characterization of household spending growth to "moderate" from "strong" as "business fixed investment and exports remain weak."

Nonresidential business investment declined an annualized 1.5% after falling at a 2.3% pace in the previous three months. Spending on structures and equipment weakened, particularly in the slumping energy sector, and trade uncertainty continued to weigh on companies.

"The outlook for the business investment side of things is pretty dark," Cummins said.

Meanwhile, the autoworkers' strike at General Motors represented a drag on fourth-quarter growth. Motor vehicle output subtracted 0.81 percentage point from GDP, the most since late 2015, following the largest boost since 2009. GDP excluding auto production climbed 3% in the fourth quarter after 1.3% in the previous period.

At the same time, a pickup in home building helped soften the blow. Residential construction outlays increased at a 5.8% rate, the strongest in two years and following a 4.6% advance in the third quarter.

A narrowing in the trade deficit -- largely due to a sharp drop in imports amid the U.S.-China trade war -- gave a significant boost to the main GDP number. Net exports added 1.48 percentage points to growth, the most since 2009. That helped to offset a 1.09 percentage point drag from inventories.

Meanwhile, the Fed's preferred underlying inflation measure, the personal consumption expenditures price index excluding food and energy, rose at a 1.3% annualized pace in the quarter, well below policy makers' 2% objective.

A separate Labor Department report out Thursday showed initial filings for unemployment benefits fell by 7,000 to 216,000 in the week ended Jan. 25. The four-week average, a less volatile measure, decreased to 214,500. The historically-low figure suggests a solid labor market.

The fourth-quarter GDP figures will be revised in February and March as additional source data are compiled.

 

 

 

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