The U.S. Department of Commerce released the much-delayed GDP report for the third quarter last week. Data showed that the U.S. economy posted one of the best years of growth in nearly a decade. This marks a strong period of expansion, despite growth rising at a modest pace in the three months ending December 2018.
The slower momentum came about due to the trade disputes with China and other key nations. The partial government shutdown that was the longest in U.S. history also played a role.
Consumer spending remains strong in Q4
Consumer spending was strong, largely due to the strong labor market. The tax cuts fueld growth and an increase in household incomes.
Consumer spending data showed that it remained strong. Consumer spending rose 2.8% on an annual basis in the fourth quarter. This was better than the average spending rate of 2.4% in the expansion so far. Sales of high-value items such as automobiles and recreational vehicles besides apparel boosted sales.
The U.S. GDP, which is a measure of the goods and services that are produced in the country rose 2.6% in the three months ending December 2018. This marked an annual increase after adjustments for seasonal changes.
The fourth quarter GDP was somewhat slower compared to the 3.4% increase seen in the third quarter of the year and a solid 4.2% gain witnessed in the second quarter of this year. Economists had forecast that the GDP would rise 2.2% in the fourth quarter.
Output rose 3.1% in the period compared to a year before. This marked a second consecutive quarter where output came in above 3%. The U.S. government set a target of achieving a 3.0% growth as its goal. It therefore launched a series of measures such as tax cuts, deregulation in some industries and taking on a tougher stance on trade to reduce the trade deficit with other nations.
However, economists doubt the growth will sustain itself in the coming quarters.
Trump administration targets 3.0% growth for 2019
Washington remains confident that growth will top 3% once again this year. However, Fed officials note that there is a slowing trajectory. This is because economic output came in at 2.3% in 2019 and is expected to slow to 2.0% by 2020, then to 1.8% by 2021.
This comes as a result of the partial government shutdown which saw business inventories rising strongly, building up the momentum from the third quarter. As a result, this puts businesses in a position to cut back on output in the coming months. We can expect growth to remain somewhat stunted in the coming quarters.
For the first quarter of 2019, economists assess that GDP growth will slow to 1.1% in the three months ending March. If true, this would mark the slowest pace of increase since 2015.
However, if the U.S. and China agree to a trade deal which looks increasingly possible, the U.S. could boost its exports to China. This would also reduce the trade deficit and keep the trade tariffs on China at the current levels of 10%.
Washington took a strong stance on Beijing as it set a 90-day deadline to chalk out a trade deal. Failing to meet the deadline would automatically raise the tariffs to 25%. However, recent news reports suggest that both parties are continuing with the negotiations.
President Trump recently extended the deadline of the end of March, citing that there was significant progress made in the trade talks with China.
Business investment picks up in Q4 2018
Business investment, which slumped in the third quarter also bounced back in the fourth quarter.
The rebound in business investments was of particular importance as it could outline future growth prospects.
Business investment also picked up sharply in the fourth quarter. Non-residential fixed investment which measures spending on items such as software, research and development, and infrastructure advanced at a pace of 6.2%. This was up from the third quarter’s 2.5% increase.
The GDP data comes ahead of this week’s monthly payrolls report covering the month of February.