U.S. economy expands at 2.1% in fourth quarter of 2016, boosted by consumer spending

by Wesley Brown ([email protected]) 213 views 

The U.S. economy closed out the fourth quarter of 2016 with moderate growth of 2.1% as strong consumer spending and private and business investment was offset by falling exports and declines in government spending, according to the “third” and final estimate of the U.S. Bureau of Economic Analysis (BEA).

The previous “advance” and second estimate of Gross Domestic Product (GDP) in the fourth quarter showed that the U.S. economy expanded at an annual rate of 1.9%. GDP is the value of goods and services produced by the nation’s economy less the value of the goods and services used up in production.

The upward revision to real GDP growth, based on more complete source information, was more than accounted for by an upward revision to consumer spending, largely in services.

“With this third estimate for the fourth quarter, the general picture of economic growth remains largely the same,” the BEA noted.

For the year, real GDP increased 1.6% in 2016 compared with an increase of 2.6% in 2015. The quarterly GDP report 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.

Still, the bland snapshot of the U.S. economy in 2016 was slightly better than the 2% forecast by a survey of Wall Street economists, but is also a cause of concern for the Trump administration that has promised sustained economic growth well above 3% annually.

The latest AtlantaGDPNow forecast, produced by the Federal Reserve Bank of Atlanta, predicts real GDP growth in the first quarter of 2017 at a weak 1%. Two weeks ago, the nation’s Central Bank raised the federal runs rate from 0.5%-0.75% to 0.75%-1%, the first of three expected rate hikes in 2017.

In early March, the Conference Board downgraded its first quarter GDP forecast from 2.2% to only 1.6%.

“The data suggests weaker than expected consumer and government construction spending along with a drop in exports of capital goods, resulting in a surge in the trade deficit,” said the corporate-backed global research group.

Even with a return to trend, real spending increases for February and March won’t be enough to offset the January results, the Conference Board said in a recent research note.

“Continued relatively strong job and wage growth in an already tight labor market, improving housing market, and the wealth effect of recent stock market gains (and potential personal income tax cuts later this year) all suggest consumer sentiment and spending will remain solid,” the Conference Board said. “But while the good news is consumer demand may be reverting to trend, the bad news is business spending remains on a weak trend, despite a solid gain in business sentiment.”

Overall, real gross domestic income rose 1% in the fourth quarter, compared with an increase of 5% percent in the third. The average of real GDP and real GDI, a supplemental measure of U.S. economic activity that equally weights GDP and GDI, increased 1.5% in the fourth quarter, compared to 4.3% in the third quarter.

The increase in real GDP in the fourth quarter reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, residential fixed investment, nonresidential fixed investment, and state and local government spending that were partly offset by negative contributions from exports and federal government spending. Imports, which are a subtraction in the calculation of GDP, rose slightly.

Current-dollar GDP jumped 4.2%, or $194.1 billion, in the fourth quarter to a level of nearly $18.9 trillion. In the third quarter, current-dollar GDP increased 5%, or $225.2 billion. The price index for gross domestic purchases rose 2% in the fourth quarter, compared with an increase of 1.5% in the third quarter. The PCE price index improved 2%, compared to 1.5% in the previous quarter. Excluding food and energy prices, the PCE price index increased 1.3%, compared to 1.7% in the third quarter.

For the year, real GDP rose 1.6% in 2016, compared with an increase of 2.6% in 2015. From the fourth quarter of 2015 to the fourth quarter of 2016, real GDP increased 2% versus 1.9% in the previous year.

Current-dollar GDP spiked 3%, or $532.5 billion, in 2016 to a level of $18.6 trillion, compared with an increase of 3.7% percent, or $643.5 billion, in 2015. Real GDI rose 1.6% in 2016, compared with an 2.5% improvement in 2015. The price index for gross domestic purchases increased 1% percent in 2016, up from 0.4% in 2015.

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