WASHINGTON: The US economy slowed less than expected in the fourth quarter amid solid consumer and business spending, leaving 2018 growth just shy of the Trump administration's three per cent annual target.
The Commerce Department's gross domestic product (GDP) report on Thursday (Feb 28) offered the latest assessment of the impact of President Donald Trump's economic policies, including deregulation, tax cuts, increased government spending and tariffs aimed at securing more favourable trade deals.
Trump has touted the economy as one of the biggest achievements of his presidency and declared last July that his administration had "accomplished an economic turnaround of historic proportions."
Gross domestic product increased at a 2.6 per cent annualised rate in the fourth quarter after expanding at a 3.4 per cent pace in the July-September period.
The economy grew 2.9 per cent in 2018, powered by the White House's US$1.5 trillion tax cut and increased government spending. It was the best performance since 2015 and better than the 2.2 per cent logged in 2017.
Economists polled by Reuters had forecast GDP rising at a 2.3 per cent rate in the fourth quarter. Despite the economy's strong performance in the last quarter and in 2018, there are indications activity is softening, with most manufacturing measures weakening in January and February.
The labour market is also showing signs of cooling, with a report from the Labour Department on Thursday showing the number of Americans drawing unemployment benefits rising to a 10-month high in the week ended Feb 16.
The economy is slowing as the boost from fiscal stimulus fades. Growth is also being restrained by a trade war between the United States and China.
The slowdown comes at a time when the economy's outlook is also being clouded by signs of weakening global demand and uncertainty over Britain's departure from the European Union.
These factors support the Federal Reserve's "patient" stance towards raising interest rates further this year. Fed Chairman Jerome Powell reaffirmed the US central bank's position in his testimonies before lawmakers on Tuesday and Wednesday.
The dollar trimmed losses against a basket of currencies on the GDP data, while US Treasury yields rose. US stock index futures slightly pared losses.
SOLID CONSUMER SPENDING
The fourth-quarter GDP report was delayed by a 35-day partial shutdown of the government that ended on Jan 25, which affected the collection and processing of economic data.
The Commerce Department said while it could not quantify the full effects of the shutdown, it estimated the partial closure had subtracted about one-tenth of a percentage point from fourth-quarter GDP growth through "a reduction in the labour services supplied by federal employees and reduction in intermediate purchases of goods and services by non-defence agencies."
Growth in consumer spending, which accounts for more than two-thirds of US economic activity, increased at a still strong 2.8 per cent rate in the fourth quarter. Consumer spending grew at a robust 3.5 per cent rate in the third quarter.
Trade tensions with China could constrain the economy for a while. US Trade Representative Robert Lighthizer told lawmakers on Wednesday that Washington's issues with China were "too serious" to be resolved with promises from Beijing to buy more American goods and a threat of higher tariffs could loom over trade with China for years.
The trade dispute has combined with a strong dollar and weakening global demand to restrain export growth. It also led cautious businesses to hoard imports, causing the trade deficit to widen.
The trade shortfall subtracted 0.22 percentage point from fourth-quarter GDP growth after slicing off two percentage points in the July-September period. With consumer spending slowing, some of the imports probably ended up in warehouses.
This accelerated inventory accumulation, which offset some of the drag on GDP growth from the trade deficit.
Inventories increased at a US$97.1 billion rate in the fourth quarter after rising at an US$89.8 billion pace in the July-September quarter. Inventory investment added 0.13 percentage point to GDP growth last quarter after contributing 2.33 percentage points in the prior period.
Business spending on equipment accelerated in the fourth quarter from the prior period, growing at a 6.7 per cent rate. It had slowed since the first quarter of 2018.
Residential construction contracted at a 3.5 per cent rate, marking the fourth straight quarterly decline. Homebuilding has been weighed down by higher mortgage rates, land and labor shortages as well a tariffs on imported lumber.
Government investment increased at a 0.4 per cent rate, the slowest since the third quarter of 2017.