LDN - Business

U.S. economic growth slows less than expected in fourth quarter

[February 28, 2019] By Lucia Mutikani

WASHINGTON, (Reuters) - The U.S. economy slowed less than expected in the fourth quarter amid solid consumer and business spending, leaving 2018 growth just shy of the Trump administration's 3 percent annual target.

The Commerce Department's gross domestic product (GDP) report on Thursday offered the latest assessment of the impact of President Donald Trump's economic policies, including deregulation, tax cuts, increased government spending and tariffs aimed at securing more favorable trade deals.

Trump has touted the economy as one of the biggest achievements of his presidency and declared last July that his administration had "accomplished an economic turnaround of historic proportions."

Gross domestic product increased at a 2.6 percent annualized rate in the fourth quarter after expanding at a 3.4 percent pace in the July-September period. The economy grew 2.9 percent in 2018, the best performance since 2015 and better than the 2.2 percent logged in 2017.

Economists polled by Reuters had forecast GDP rising at a 2.3 percent rate in the fourth quarter. The release of the fourth-quarter GDP report was delayed by a 35-day partial shutdown of the government that ended on Jan. 25, which affected the collection and processing of economic data.

The Commerce Department said while it could not quantify the full effects of the shutdown, it estimated the partial closure had subtracted about one-tenth of a percentage point from fourth-quarter GDP growth through "a reduction in the labor services supplied by federal employees and reduction in intermediate purchases of goods and services by nondefense agencies."

It also said the fourth-quarter GDP growth estimate was "based on source data that are incomplete or subject to further revision by the source agency."

There are signs the economy slowed further early in the first quarter, with most manufacturing measures weakening in January and February.

The economy is cooling as the boost from the White House's $1.5 trillion tax cut and increased government spending fades. Growth is also being restrained by a trade war between the United States and China, which economists say is making businesses and households more cautious about spending.

The slowdown comes at time when the economy's outlook is also being clouded by signs of cooling global demand and uncertainty over Britain's departure from the European Union.

These factors support the Federal Reserve's "patient" stance towards raising interest rates further this year. Fed Chairman Jerome Powell reaffirmed the U.S. central bank's position in his testimonies before lawmakers on Tuesday and Wednesday.

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Shoppers carry bags of purchased merchandise at the King of Prussia Mall, United States' largest retail shopping space, in King of Prussia, Pennsylvania, U.S., December 8, 2018. REUTERS/Mark Makela/File Photo

SOLID CONSUMER SPENDING

Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a still strong 2.8 percent rate in the fourth quarter. Consumer spending increased at a robust 3.5 percent rate in the third quarter.

Trade tensions with China could constrain the economy for a while. U.S. Trade Representative Robert Lighthizer told lawmakers on Wednesday that Washington's issues with China were "too serious" to be resolved with promises from Beijing to buy more American goods and a threat of higher tariffs could loom over trade with China for years.

The trade dispute has combined with a strong dollar and weakening global demand to undercut export growth. It also led cautious businesses to hoard imports, causing the trade deficit to widen.

The trade shortfall subtracted 0.22 percentage point from fourth-quarter GDP growth after slicing off 2 percentage points in the July-September period. With consumer spending slowing, some of the imports probably ended up in warehouses. This accelerated inventory accumulation, which offset some of the drag on GDP growth from the trade deficit.

Inventories increased at a $97.1 billion rate in the fourth quarter after rising at an $89.8 billion pace in the July-September quarter. Inventory investment added 0.13 percentage point to GDP growth last quarter after contributing 2.33 percentage points in the prior period.

Business spending on equipment accelerated in the fourth quarter from the prior period, growing at a 6.7 percent rate. It has slowed since the first quarter of 2018.

Residential construction contracted at a 3.5 percent rate, marking the fourth straight quarterly decline. Homebuilding has been weighed down by higher mortgage rates, land and labor shortages as well a tariffs on imported lumber. Government investment increased at a 0.4 percent rate, the slowest since the third quarter of 2017.

(Reporting by Lucia Mutikani; Editing by Tomasz Janowski and Andrea Ricci)

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