Weak Q4 GDP Figure Belies True Strength in U.S. Economy

Richard Branch
Senior Economist

The advance estimate for fourth quarter GDP growth was 1.9%, slower than the consensus estimate of 2.2%. The report highlighted the growing dichotomy between the internal and external portions of the U.S. economy.

First the bad news. The trade deficit grew $77 billion dollars in the fourth quarter, sapping 1.7 percentage points from the overall GDP growth figure. Imports grew at an annualized pace of 8.3% vs. a decline of 4.3% for exports. The trade weighted U.S. Dollar Index is near a fifteen-year high, making imports to the U.S. cheap, and our exports more expensive when shipped abroad. Trade is a hot-button issue with the new Trump Administration; however, with weak global growth and a growing interest rate spread between the U.S. and major trading partners, the dollar is likely to face upward pressure through the year. This will make the Administration’s job difficult in turning around the trade deficit.

The good news is that consumers and businesses seem willing to spend. Consumer spending rose at an annualized 2.5% pace in the fourth quarter. While slower than the 3.0% growth posted in the third quarter, it is still a healthy rate of spending. Additionally, residential investment climbed an annualized 10.2% after falling in the previous two quarters. Nonresidential investment increased at an annualized pace of 2.4% in the quarter, due to higher spending on equipment and intellectual property, while investment in structures dropped 5.0%.

For the full year 2016, GDP growth was a disappointing 1.6% - the slowest annual pace of growth for the U.S. economy since 2011. Much of this was due to a very weak first half of the year. The U.S. economy strengthened in the second half of the year, and with the labor market continuing to improve it’s expected further strengthening will be present during 2017. President Trump’s pro-growth policies will certainly help in this effort; however, with the economy operating near full employment inflation concerns may cause the Federal Reserve to lift rates throughout the year. This would have a muting effect on the economic growth potential.



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