US economy grows slower than expected

Trade and inventories a drag in fourth quarter, offsetting rise in consumer spending

WASHINGTON • The US economy expanded at a slower-than-projected pace in the fourth quarter on drags from trade and inventories, offsetting strength in consumer spending and business investment that signals solid momentum entering 2018.

Gross domestic product (GDP) rose at a 2.6 per cent annualised rate after 3.2 per cent in the prior period, Commerce Department data showed yesterday. Consumer spending, the biggest part of the economy, rose 3.8 per cent, the best in more than a year. Business equipment investment grew at the fastest pace in three years.

While the report dashed expectations for the longest streak of 3 per cent-or-better growth since 2005, a key measure of underlying demand delivered the strongest performance since 2014 and inflation picked up, which will help keep the Federal Reserve on track to raise interest rates in coming months.

President Donald Trump's move to cut taxes may give the economy an additional boost this year, though reaching his goal of sustained 3 per cent GDP growth will prove challenging, in part because household purchases are projected to cool.

Weak productivity and slow labour-force expansion will also pose hurdles in the longer term, and higher borrowing costs could crimp gains as well.

"The economy's performance over the course of 2017 has been more mixed than overwhelmingly positive," Mr Stephen Stanley, chief economist at Amherst Pierpont Securities, said in a note before the report. Still, he said "economic momentum will remain strong, and may accelerate further, in 2018".

Fourth-quarter GDP was dragged down mainly because the trade deficit widened, as imports rose at double the pace of exports.

For a better sense of underlying domestic demand, economists look at final sales to domestic purchasers, which strip out inventories and trade, the two most volatile components of GDP. Such sales grew 4.3 per cent last quarter, the most since 2014, after a 1.9 per cent increase.

For the full year, GDP, the value of all goods and services produced, grew 2.5 per cent in the fourth quarter from a year earlier, the Commerce Department report also showed. On that basis, it was the strongest annual performance since 2014's 2.7 per cent. The expansion is now in its ninth year and is poised to become the country's second-longest on record later in 2018.

Wage gains remain tepid even with steady hiring and the lowest unemployment rate since 2000. Petrol expenses are ticking up, consumer debt is rising, and borrowing costs are projected to keep rising gradually as the Fed tightens monetary policy.

A measure of inflation, which is tied to consumer spending and strips out food and energy costs, climbed at a 1.9 per cent annualised pace after a 1.3 per cent increase.

The GDP estimate is the first of three for the quarter, with revised figures scheduled for next month and March when more information becomes available.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on January 27, 2018, with the headline 'US economy grows slower than expected'. Subscribe