Trade Helps U.S. Economy Grow 2.1% While Consumption Moderates

NEW YORK (Capital Markets in  Africa): 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 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. Business investment declined for a third straight period, the longest stretch since the last recession.

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.

Bigger cutbacks in business investment remain a risk if they translate into weaker job gains and slower consumer spending, and the suspension of production for Boeing Co.’s 737 Max 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 suggest growth will hold up.

Slower consumption growth is consistent with the message from Federal Reserve 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.”

Fed Forecast
The fourth-quarter GDP figures are consistent with the Fed’s 2% growth forecast for 2020, indicating policymakers can hold the line on interest rates after three reductions in 2019.

Full-year GDP grew 2.3% in 2019, slower than the 2.5% in 2018. Economists expect growth to further moderate in 2020, as the waning effects of tax cuts and cooling wage gains make achieving Donald Trump’s goal of sustained 3% economic expansion difficult in the late-stage expansion.

Business investment declined an annualized 1.5% after falling at a 2.3% pace in the previous three months. Spending on structures and equipment continued to weaken.

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.

Trade Boost
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 policymakers’ 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 third-quarter figures will be revised in February and March as additional source data are compiled.

Source: Bloomberg Business News