_U.S. gross domestic product: Better times ahead?

Top-line U.S. GDP growth in the fourth quarter of 2016 failed to impress. However, the preliminary estimate released today by the Commerce Department suggests the economy is entering 2017 with a bit more momentum.

Here are the details:

• GDP increased 1.9% at an annualised rate last quarter (the black line in the chart below), trailing the 2.2% median forecast in Bloomberg’s survey of analysts. Growth in 2016 came in at 1.6%, its lowest level since 2011.
• Consumers stayed in the game thanks to solid job growth, strong home price appreciation, improving confidence and historically low levels of debt. Personal consumption, which accounts for more than two-thirds of the economy, grew at a 2.5% annualised rate, adding 1.7 percentage points to fourth-quarter GDP. For the full year, personal consumption rose by 2.7%.
• Exports slipped and imports rose in the fourth quarter, with net exports subtracting 1.7 percentage points from overall GDP. The decline in export growth was payback for a one-time surge in soybean exports to China in the third quarter. The increase in imports was related to the strong dollar, which makes imports cheaper. For the full year, net exports were a small drag, subtracting 0.1 percentage points from growth.
• Business investment (called non-residential fixed investment by economists) showed some life in the fourth quarter, likely related to a return to profit growth in the third quarter. Business spending grew by 2.4%, the best performance in the last five quarters. For the full year, however, business spending slipped by 0.4%, the worst performance since the recession year of 2009.
• Inventories added a full percentage point to fourth-quarter GDP, the biggest increase since the first quarter of 2015. This could be a near-term drag on production if companies’ stockpiles of inventories become too large relative to sales.
• Residential investment surged by 10.2% in the fourth quarter, adding 0.4 points to fourth-quarter GDP. 
• Government spending added 0.2 percentage points to fourth-quarter GDP.
• The Fed’s favoured measure of inflation, the core PCE deflator, which excludes food and energy, dipped to 1.3% at an annualised rate in the fourth quarter, well below the Fed’s informal 2.0% target. Inflationary pressures, although beginning to build, are not yet an issue.

Three takeaways from today’s report, relative to the economic ideas being discussed by the Trump administration and Congress:

• The U.S. economy continues to motor along at a moderate rate of growth, well below the 3 to 4 percent range mentioned as an informal goal by the Trump administration.
• The administration’s ideas for tax cuts and infrastructure spending could boost GDP, along with inflation and interest rates, but likely not until late 2017 at the earliest, depending on when they are passed and what form they take.
• The most interesting and hopeful sign in today’s report is the uptick in business capital spending, which is emerging from a trough in recent quarters. The new administration’s ideas for a business tax cut and regulatory relief could build on this momentum, though tariffs and other trade restrictions could dampen or reverse it.

Written by Robert Bach, Newmark Grubb Knight Frank, Director of Research – Americas.

Read previous U.S. market insights here