The Devil is in the Details — 2019Q4 GDP

By Richard Branch, Chief Economist

BEDFORD, MA – January 30, 2020 – The advance reading for U.S. Gross Domestic Product in the fourth quarter came in at a close-to-expected annualized 2.1%. While likely to be revised in the coming months, it painted a picture of an economy that continues to hover near its potential rate.

A closer look at the details, however, suggests that there are reasons to expect slower growth in 2020. On the plus side, the fourth quarter pace of government spending picked up driven equally by state and local governments and federal defense spending. Trade also provided a sizeable positive contribution to the headline number as exports jumped and imports tumbled.

Total fixed investment was neutral in the fourth quarter. As expected, residential investment picked up in line with rising sales and construction of single family housing in the fourth quarter. However, nonresidential investment in both equipment and structures declined for the third consecutive quarter most likely due to uncertainty over trade policy. Inventories were also a net drag on headline GDP.

The consumer, who has been the stalwart of economic growth through most of 2019, took a concerning breather, however, as spending growth cooled from an annualized 4.6% in the second quarter and 3.1% in the third quarter to just 1.8% in the final three months of the year.

For the full year, the U.S. economy grew at a 2.3% pace, down from the 2.9% rate in 2018, but about on par with growth in 2017.

Looking ahead, labor constraints are likely to slow employment growth in 2020 making it harder for consumers to sustain their level of contribution to the economic growth. Business investment is also likely to remain sluggish as uncertainty over trade policy continues despite the Phase I trade deal signed between the U.S. and China in early-January. Residential construction will also struggle to gain a foothold as margins to build entry level homes for the ballooning millennial generation remain tight. All told, economic growth will slow but remain positive in 2020, allowing the longest expansion in U.S. history to continue.