U.S. economy in 4Q slows faster than expected, 2018 GDP growth ends at 2.9%

The U.S. economy is braking faster than previously thought as the final GDP reading for the fourth quarter showed moderate growth of only 2.2%, the U.S. Commerce Department’s Bureau of Labor Analysis reported Thursday (March 28).

According to the BEA’s “third” and final GDP estimate for 2018, real U.S. gross domestic product (GDP) in the fourth quarter was an average 2.2%%, down 0.4 percentage points from the “initial” estimate released in February and the brushed-up growth of 3.4% in the third quarter.

With the lower GDP estimate – which measures the value of goods and services produced by the nation’s economy less the value of the goods and services used in production — the U.S. economy is on pace to close out the year at 2.9%, just below the Trump administration’s 3% target for annual GDP growth.

Still, the nation’s expanding economic growth in 2018 is well above the long-term two-percent trend. Department of Commerce Secretary Wilbur Ross said the GDP update shows President Donald Trump’s policies have fueled a vibrant economy, despite falling short of Wall Street expectations.

“Three percent growth fulfills the President’s promise to restore economic growth in the U.S., benefitting American workers through better jobs and better wages,” Ross said in a statement, apparently rounding up the 2.9% figure.

In 2019, most U.S. economists expect the GDP decline to continue over the entirety of President Trump’s first term. In 2019, the influential Conference Board expects growth to slow further to around 2.6% as effects from the administration’s 2017 corporate tax cut stimulus wane.

“Consumer spending is buoyed by a tight labor market which is driving more rapid wage gains. Businesses face a shrinking pool of available workers that could slow growth further during the year unless past investments have raised labor productivity, which recent data provide modest signals to support,” the Conference Board said in its recent monthly economic forecast. “A shift in Federal Reserve policy towards looser monetary policy should keep business confidence and investment sufficiently solid throughout 2019.”

Conference Board chief economist Gad Levanon in recent research note said much depends on inflation going forward. If consumer prices rise more rapidly than anticipated, he said, the Federal Reserve may still raise interest rates later in 2019 to prevent the economy from overheating.

“This may become a greater risk if businesses pass rising labor costs onto their customers,” he said.

After advancing 2% and 4.2%, respectively, in the first and second quarter, the U.S. economy remained hot through July, August and September in step with Wall Street expectations. Together with GDP growth of 3.4% and 2.6% growth in the third and fourth quarters respectively, U.S. economic output for the year averaged 2.9%, BEA data shows.

In 2017, the nation’s economy grew at an annual rate of only 2.2%. A survey of top U.S. economists had forecasted GDP growth of 3.1% in 2018 and 2.3% GDP growth in 2019, according to the Wall Street Journal’s Economic Forecast Survey.

Due to the recent partial government shutdown in the first quarter, the initial report for the fourth quarter and yearly GDP for 2018 replaced the release of the “advance” estimate originally scheduled for Jan. 30 and the “second” estimate originally scheduled for Feb. 28.

BEHIND THE NUMBERS
Nationwide, real gross domestic income (GDI) increased 1.7% in the fourth quarter, compared with an increase of 4.6% in the third quarter. The average of real GDP and real GDI, a supplemental measure of U.S. economic activity, increased 1.9% in final three months of 2019 versus a spike of 4% in the previous quarter

Commerce Department officials said the increase in real GDP in the fourth quarter reflected positive contributions from personal spending, nonresidential fixed investment, exports, private inventory investment and continued federal government spending, which has pushed U.S. debt to more than $22 trillion. Those gains were partly offset by negative contributions from residential fixed investment and state and local government spending.

In the fourth quarter, current dollar GDP increased 4.1%, or $206.9 billion, to a level of $20.87 trillion. In the third quarter, current-dollar GDP increased 4.9%, or $246.3 billion. The U.S. price index for gross domestic purchases, which includes food and energy prices, rose 1.7% in the fourth quarter, compared with an increase of 1.8% in the prior three-month period.

Profits from current production decreased $9.7 billion in the fourth quarter, in contrast to an increase of $78.2 billion in the third quarter. Profits of domestic financial corporations decreased $25.2 billion for the three-month period, compared with a decrease of $6.1 billion in the third quarter.

Fourth quarter profits of domestic non-financial corporations increased $13.6 billion, compared with an increase of $83.0 billion in the previous quarter. Rest-of-the-world profits in the final quarter of 2019 increased $1.9 billion versus $1.3 billion in the third quarter.

For the year, current-dollar GDP in 2018 increased 5.2%, or $1.01 trillion, in 2018 to a level of $20.49 trillion, compared with an increase of 4.2%, or $778.2 billion, in 2017. Real GDI increased 2.4% in 2018, versus 2,3% in 2017. The price index for gross domestic purchases increased 2.2% in 2018, compared to 1.9% in 2017.

The BEA, which is the economic research group within the U.S. Department of Commerce, will release its first “advance” estimate for the first quarter of 2019 on April 26. The Atlanta GDPNow expects the U.S. economy to see weak GDP growth of 1.5% in the first quarter.