Economy coasting? 2018 Q4 GDP slides to 2.6% -- but beats expectations

The delayed report on the health of the US economy offered some mixed signals, especially against some pessimistic expectations. The annualized GDP number fell a little short of the previous two quarters, coming in at 2.6%, but it beat the 2.2% number economists had anticipated. “This isn’t so bad,” CNBC’s Rick Santelli noted, declaring that today’s GDP report from the Bureau of Economic Statistics was “worth the wait.”

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U.S. economic growth was better than expected as 2018 came to a close, with GDP rising 2.6 percent, according to a first estimate the Commerce Department released Thursday.

Economists surveyed by Dow Jones expected a gain of 2.2 percent after a 3.4 percent rise in the third quarter. The growth came amid a bevy of uncertainty and a time when the stock market briefly slid into bear market territory.

CNBC’s Jeff Cox pegged the annual GDP rate growth at 3.1%, which would be a dramatic difference from annual growth rates in the Obama era. The Commerce Department, however, calculated it a bit lower, a near-miss on the 3% mark and equivalent to 2015’s overall growth:

Real GDP increased 2.9 percent in 2018 (from the 2017 annual level to the 2018 annual level), compared with an increase of 2.2 percent in 2017 (table 1).

The increase in real GDP in 2018 primarily reflected positive contributions from PCE, nonresidential fixed investment, exports, federal government spending, private inventory investment, and state and local government spending that were slightly offset by a small negative contribution from residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased (table 2).

The acceleration in real GDP from 2017 to 2018 primarily reflected accelerations in nonresidential fixed investment, private inventory investment, federal government spending, exports, and PCE, and an upturn in state and local government spending that were partly offset by a downturn in residential investment.

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The more pedestrian number follows two quarters where growth was more substantial — 4.2% in Q2 and 3.4% in Q3. That level of growth even in the middle of trade fights with China, Canada, and Mexico had given the Trump administration a lot of bragging rights, although it didn’t have the impact on the midterms that it might have had after being overshadowed by the border-wall fight. The drop of nearly a full point to 2.6% reflects a parallel drop in consumer spending growth, the rate for which fell from 3.5% to 2.8%. Inventory levels stayed relatively constant, with final sales to domestic purchasers coming it at 2.6% as well.

Those are the mildly bad takeaways. On the plus side, the difference between expectations and results this time around was mainly business investment, Bloomberg reports. That reflects well on the GOP’s tax cut in 2017, which is still having a positive impact on the economy:

The U.S. economy cooled by less than expected last quarter as business investment picked up, suggesting growth could be stronger for longer as the Federal Reserve takes a patient approach to interest rates. …

The report shows how Republican-backed tax cuts may have continued to aid growth and help bring the full-year figure to 3.1 percent, just above President Donald Trump’s 3 percent goal. While the expansion is poised to become the nation’s longest on record at midyear amid a still-healthy consumer, supportive Fed and robust labor market, the pace could cool amid the trade war, slowing global growth and fading impact of fiscal stimulus.

The strength in overall private domestic demand “is good enough to keep the momentum in the economy going,” with research and development spending being a “bright spot” in the report, said Neil Dutta, head of economics at Renaissance Macro Research LLC.

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It’s not bad, as Santelli observed, and there’s room to grow, especially if Trump can settle the trade war favorably with China. It’s not great either, but it’s not bad, and the economy is still doing better than analysts predict.

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