The US economic rebound lost some of its vigour in the final months of 2018 as consumers reined in spending growth and residential investment shrank for the fourth quarter in a row.
Gross domestic product rose at an annualised pace of 2.6 per cent during the fourth quarter — a solid reading but slower than the robust 3.4 per cent and 4.2 per cent expansions clocked respectively in the previous two quarters. The full-year growth rate of 2.9 per cent marginally undershot the 3 per cent target that has been touted by US President Donald Trump.
The commerce department report, delayed by a 35-day partial shutdown of the government that ended on January 25, will leave the Federal Reserve determined to keep rates unchanged, as it gauges how heavily slowing growth in China and Europe, coupled with dwindling fiscal stimulus, will drag on the US in 2019.
Inventory investment, which underpinned growth in the final quarter, may unwind in the coming months, depressing growth early this year. On top of that, the fiscal stimulus that Congress approved in late 2017 and early 2018 will begin to peter out, further weighing on the expansion.
Megan Greene, chief economist at Manulife Asset Management, said the fourth-quarter numbers were “respectable”, but she predicted the first three months of 2019 will be a “much slower quarter for growth.”
“We should have expected the US to decelerate towards its potential growth,” she added.
Thursday’s growth reading was somewhat firmer than Wall Street’s expectations for 2.2 per cent annualised growth. Consumer spending, which accounts for over two-thirds of the economy, grew at an annual rate of 2.8 per cent in the fourth quarter, slower than the pace of 3.5 per cent in the third quarter and weaker than the 3 per cent that analysts had forecast.
Private domestic investment grew at a 4.6 per cent rate, down from 15.2 per cent from the third quarter. Within that category, spending on intellectual property was buoyant, rising at an 13.1 per cent pace, but the housing market remained a major weak spot.
Residential investment shrank at a 3.5 per cent pace in the final three months of 2018. As a result, last year saw the first string of four uninterrupted quarters of declines since the depths of the financial crisis, said Harm Bandholz of UniCredit in New York.
The housing market, he said, was being held back by affordability problems as well as the impact of past interest rate increases. He expects a broader weakening in the US economy in 2019 and 2020. “The stimulus impact will fade, the labour market is slowing down, and corporate balance sheets look weak. We think growth will slow down quite a bit this year and in 2020,” he said.
Discussing the US prospects on Thursday, Fed vice-chairman Richard Clarida said his “baseline outlook” for growth, employment, and inflation remained positive, but he reiterated the central bank’s focus on cross-currents, including slowing Chinese and European growth, as well as volatile financial conditions.
Even if one of the Fed’s economic models were to predict a surge of inflation, the central bank needed to balance arguments for a pre-emptive rate rise against the “considerable cost of the model being wrong,” Mr Clarida said at a conference in Washington DC.
“Given muted inflation and stable inflation expectations, I believe we can be patient and allow the data to flow in as we determine what future adjustments to the target range for the federal funds rate may be appropriate to strike this balance.”
