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Fourth quarter GDP growth was an 'optical illusion'

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But the story should improve in 2020

The U.S. economy sputtered to finish off 2019.

On Thursday, we learned U.S. GDP growth came in slightly faster than forecast in the fourth quarter of the year at 2.1%. Wall Street had expected growth would settle at 2% in the year’s final three months. For the full year, the U.S. economy grew at 2.3%, a slowdown from 2.9% pace of growth we saw in 2018 following Trump’s tax cuts.

But this data comes with some big caveats that cover up clear weakness that emerged across the economy to end 2019.

“While the average 2.3% GDP advance in 2019 is only marginally weaker than the 2.4% print in 2017, this is yet another optical illusion as the most recent three quarters mark the economy’s worst performance since the 2016 slump,” economists at Oxford Economics said in a note on Thursday.

Oxford notes that more than 70% of the fourth quarter’s jump in GDP came from unexpectedly strong trade data. In the fourth quarter, imports fell at an annualized rate of 8.7% while exports rose at a rate of 1.4%. The net exports data that feeds into GDP is the total of imports minus exports, and so while trade slowed in the fourth quarter this data served to boost the growth calculation.

“Net trade represented the largest optical illusion in the GDP report, providing an artificial boost to GDP growth of 1.5%,” the firm notes.

Additionally, government spending provided a boost to economic output, with Michael Feroli at JPMorgan writing Thursday that, “Real federal spending increased at a 3.6% rate last quarter and was up 4.3% for the year, the most since the Recovery Act boosted spending in 2009.” Feroli expects federal spending will slow this year.

The corporate sector and consumers also showed signs of weakness amid uncertainty around trade to finish the year.

Business investment fell at an annualized rate of 1.5% in the fourth quarter, the third straight quarter of declines with nonresidential investment in structures falling 10.1%. As Hedgeye’s Darius Dale said Thursday, “The US private sector did, in fact, grind to a halt in Q4.”

But some economists see growth stabilizing and perhaps even accelerating in the year ahead.

Paul Ashworth at Capital Economics notes that a phase one U.S.-China trade deal along with lower interest rates, “should begin to boost business investment over the coming quarters, just as they are already benefitting residential investment.” To wit, Ashworth notes that residential investment surged 5.8% during the fourth quarter.

Consumer spending in the fourth quarter also slowed to 1.8%, which Oxford Economics attributed to households showing “more caution in the face of elevated policy uncertainty and moderating income growth.”

But Ashworth argued Thursday that “with consumer confidence buoyant, employment growth trending slightly higher and the saving rate still elevated, we are not too concerned about the consumer.”

Ian Shepherdson at Pantheon Macroeconomics is also unperturbed by consumer behavior to finish the year. “We aren’t worried by the slowdown in consumption from the 3.9% average in Q2/Q3,” Shepherdson writes. “That was not sustainable and a correction was inevitable. We look for a return to trend, at about [2.75%], in Q1.”

As Ashworth writes, “With the survey evidence beginning to improve slightly, and the Phase One trade deal easing one of the headwinds holding back investment, we expect GDP growth to gradually accelerate this year.”





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