US economy slows on trade gap, but business spending rises
US economic growth slowed sharply in the fourth quarter as a plunge in shipments of soybeans weighed on exports, but steady consumer spending and rising business investment pointed to sustained strength in domestic demand.
Gross domestic product increased at a 1.9 per cent annual rate, the Commerce Department said on Friday in its first estimate of fourth-quarter GDP. The economy grew at a 3.5 per cent annual rate in the third quarter.
The slowdown masked a surge in home building spending and a rebound in business investment on equipment after four straight quarterly declines.
The economy expanded 1.6 per cent for all of 2016, the worst performance since 2011, as it struggled with weak oil prices, a strong dollar and efforts by businesses to reduce a large inventory overhang.
US President Donald Trump vowed during last year’s election campaign to deliver 4 per cent annual GDP growth, largely on the back of a plan to cut taxes, reduce regulations and increase infrastructure spending.
“The details of the report were quite sound. The US economic expansion got its mojo back and the momentum appears to be carrying over into 2017,” said Scott Anderson, chief economist at Bank of the West in San Francisco.
A measure of private domestic demand increased at a 2.8 per cent rate last quarter. Economic growth in the third quarter was driven in part by an outsized jump in soybean exports.
Excluding soybeans, GDP increased at about a 2.7 per cent rate in both the third and fourth quarters, according to analysts. Economists polled by Reuters had forecast GDP rising at a 2.2 per cent rate in the fourth quarter.
In the first half of 2016, weak corporate profits because of cheaper oil and the robust dollar undercut business spending. The inventory correction resulted in companies placing fewer orders with manufacturers. The economy grew 2.6 per cent in 2015.
With oil prices rising and global demand picking up, the economy appears set for continued expansion. A labour market at or near full employment also is starting to lift wages and is supporting consumer spending.
Although Trump has offered little detail on his economic policy, his promises have been embraced by consumers, businesses and investors. Consumer and business confidence have soared, while the US stock market has rallied to record highs.
A separate report on Friday showed consumer sentiment hitting a 13-year high in January.
“While the size and the timing of the tax cut, infrastructure spending and regulatory rollback are uncertain, economic growth could double during the second half of the year,” said Sung Won Sohn, an economics professor at California State University Channel Islands in Camarillo.
But uncertainty over the Trump administration’s trade policy and sustained dollar strength pose a risk to the economy.
In the fourth quarter, exports fell at a 4.3 per cent rate, reversing the 10 per cent increase notched in the third quarter. The fourth-quarter drop in exports was the biggest since the first quarter of 2015.
At the same time, rising domestic demand drew in imports, which increased at their quickest pace in two years. The resulting trade deficit sliced 1.70 percentage points from GDP growth, the biggest drag since the second quarter of 2010.
Most of the hit came from soybean exports, which fired up GDP growth in the third quarter after a poor harvest in Argentina and Brazil. Trade added 0.85 percentage point to GDP in the third quarter.
The dollar firmed against a basket of currencies. Stocks on Wall Street were trading mostly lower after surging to record highs during the week. Prices for US government debt rose.
A stronger economy would mean further interest rate increases from the Federal Reserve. The US central bank has forecast three rate hikes this year. It raised its benchmark overnight interest rate in December by 25 basis points to a range of 0.50 per cent to 0.75 per cent.
Consumer spending, which accounts for more than two-thirds of US economic activity, increased at a 2.5 per cent rate in the fourth quarter. The moderation from the third quarter’s brisk 3.0 per cent pace came amid modest household income gains.
Income at the disposal of households after accounting for taxes and inflation increased 1.5 per cent in the fourth quarter after rising 2.6 per cent rise in the prior period. Savings fell to US$791.2 billion from US$818.1 billion in the third quarter.
With domestic demand rising, businesses accumulated inventories at a rate of US$48.7 billion in the last quarter, up from US$7.1 billion in the third quarter. Inventories added 1.0 percentage point to GDP growth, double the contribution in the third quarter.
Business investment pushed higher, with spending on equipment increasing at a 3.1 per cent rate, the first increase in over a year. The gain reflected a surge in gas and oil well drilling, in tandem with rising crude oil prices.