This is the BEA’s initial guess at the fourth quarter’s GDP growth rate, and it estimates output to have risen by just 1.9%, following 3.5% in the previous quarter. Real final sales (GDP less inventories) were even slower at 0.9%. Real gross domestic purchases (GDP less exports plus imports) were estimated at 3.5%, following a 2.6% rise in the third quarter. Headline nominal GDP rose by 4.0% from 5.0%. Aggregate inflation for the entire economy, as measured by the GDP price index, was pegged at 2.1%, up from the third quarter’s 1.4% growth rate. Excluding food and energy, the PCE price index rose 1.1% in the quarter (annualised), which was slower than the 1.6% rate in the third quarter.
Underlying sector growth in the quarter paints a slightly more mixed picture of activity with personal consumption increasing by 2.5% and business investment rising by just 2.4%; this was the result of a 5.0% drop in structures investment against an increase of 3.1% in equipment investment (breaking four consecutive quarters of declines). In terms of actual percentage-point contributions, the fourth-quarter change in economic activity was driven by: 1) personal consumption (1.70 percentage points), 2) inventories (1.0 percentage points), 3) business investment (0.30 percentage points), 4) residential investment (0.37 percentage points) and 5) government spending (0.21 percentage points). Meanwhile, net exports subtracted 1.0 percentage points, largely due to big swings in soybean imports.
This was not a particularly great quarter, with much of the improvement being driven by modest gains in consumer spending and the inventory rebound. Business investment was nothing to write home about and trade was heavily depressed by the volatile pricing of soybean imports, were severe weather had damaged many crops in South America. The stronger dollar has also been taking its toll here, as has the recovery in energy prices. It will be difficult for President Trump to achieve his desired trade surplus if these continue. The 1.9% increase over fourth quarter 2015 also matches the 1.9% average annual rate of change during this economic recovery to date. Looking forward into 2017, somewhat steady consumer spending is likely in the face of headwinds that did not exist in 2016, though business investment should prove to be a little stronger than in 2016. As far as the Fed is concerned, this is largely backward looking data, but nevertheless still quite useful and likely strong enough to allow it to continue along its path of a desired rate increase in the coming months.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.