The U.S. economy expanded at a weak 1.9% in the fourth quarter as exports of U.S. goods saw a big drop and federal government spending declined at the end of 2016.
The “advanced” estimate of Gross Domestic Product (GDP) released Friday (Jan. 27) by the U.S. Bureau of Labor Statistics shows that dismal fourth quarter growth brought to end the worst year of GDP expansion since 2011, when the U.S. economy was weakly recovering from the Great Recession. Real GDP in 2016 increased only 1.6% in 2016, down from 2.6% in 2015.
The quarterly GDP report, which is the first of three estimates by the Department of Commerce’s BEA research group, shows the U.S. economy has lost momentum from robust growth of 3.5% in the third quarter of 2016. The Atlanta GDPNow had forecasted growth of 2.9% in the fourth quarter.
According to the BEA, “advance” estimates, based on source data that are incomplete or subject to further revision by the BEA, are released near the end of the first month following the end of the quarter. As more detailed and more comprehensive data becomes available, “second” and “third” estimates are released near the end of the second and third months, respectively.
Real gross domestic product – the value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production, adjusted for price changes – increased at a modest rate of 0.7% in the fourth quarter of 2016.
Brian Schaitkin, senior economist with the Conference Board, said growth in the second half of 2016 strengthened compared to a weak first half of the year, buoyed by strong domestic demand which has been fueled by a vibrant labor market.
“Overall, the economy enters 2017 on steady footing, but will need stronger trade and investment conditions to prevail to move substantially above 2% percent trend growth,” Schaitkin said in a research note posted Friday. “Even with a slight slowdown in job creation, wage growth is likely to continue as the amount of spare capacity firms have to draw from remains small.”
The deceleration in real GDP in the fourth quarter reflected a downturn in exports, a pickup in imports and a downturn in federal government spending that were partly offset by an upturn in residential fixed investment, an acceleration in private inventory investment, an upturn in state and local government spending, and an acceleration in nonresidential fixed investment.
Schaitkin said history suggests lower corporate tax rates, or even a repatriation holiday that has been pushed by the new Trump administration may not produce the investment boomlet market participants are yearning for.
“Trade generated a large drag on fourth quarter growth due to a stronger dollar and a correction from temporary third quarter factors which boosted exports,” he said.
Overall, current-dollar GDP increased 4%, or $185.5 billion, in the fourth quarter to a level of $18.8 trillion billion. In the third quarter, current dollar GDP increased 5%, or $225.2 billion. The price index for gross domestic purchases increased 2% in the fourth quarter, compared with an increase of 1.5% in the third quarter.
The PCE price index increased 2.2%, compared with an increase of 1.5%. Excluding food and energy prices, the PCE price index increased 1.3%, compared with an increase of 1.7%.
Current-dollar personal income increased $152 billion in the fourth quarter, compared with an increase of $172.3 billion in the third. The deceleration in personal income primarily reflected a deceleration in wages and salaries.
Disposable personal income increased $130.2 billion, or 3.7%, in the fourth quarter, compared with an increase of $141.5 billion, or 4.1%, in the third. Real disposable personal income rose 1.5%, compared with an increase of 2.6% in the previous quarter.
Personal saving was $791.2 billion in the fourth quarter, compared with $818.1 billion in the third. The personal saving rate – personal saving as a percentage of disposable personal income – was 5.6% in the fourth quarter, compared with 5.8% in the third quarter.
The disappointing year-end GDP report follows the December meeting of the Federal Open Market Committee where U.S. monetary policymakers raised the target range for the federal funds rate to 1/2% to 3/4%, and forecasted that the U.S. economy would likely grow at a rate in 2017 that would warrant up to three rate increases, up from the Central Bank’s previous forecast of only two.
The lukewarm GDP report will also provide the Trump administration with a baseline for comparable quarters under the new president. Schaitkin said higher levels of business confidence under President Trump could signal that 2017 could see the emergence of investment from “extended low growth doldrums.”
“Accelerated fourth quarter inventory build based on higher sales expectations illustrates one form of direct action firms are taking in response to increased business confidence,” said the Conference Board’s senior economist.
The BEA’s “second” estimate for the fourth quarter, based on more complete data, will be released on the last day of February.