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  Dr. Sohn's Commentary

GDP Report for Fourth Quarter 2016


January 27, 2017



 Economic growth during the fourth quarter slowed to an annual rate of 1.9 percent, down from 3.5 percent from the previous quarter. Excluding inventories, final sales grew at an annual rate of 0.9 percent. Economic growth was broadly based except exports and commercial construction. After five quarters of decline, investment shifted into high gear with equipment, IP and housing contributing significantly.   

 

Even though overall growth slowed, the underlying economic strength was solid during the final quarter of 2016. If it weren’t for the whipsaw coming from soybean exports, economic growth would have been 3.6 percent instead of 1.9 percent. The Trump economic stimulus is yet to come. While the size and the timing of the tax cut, infrastructure spending and regulatory rollback are uncertain, economic growth could double during the second half of the year.

 

Particularly encouraging in this report was the fact that investment has returned into a positive territory after declining for over a year. To be sure, higher price of oil encouraged equipment spending on oil rigs etc. but the other categories of investment including IP have rebounded nicely. Inventory building was another boost for economic growth reflecting improving mood of businesses. Housing did its part contributing to economic growth. It is pretty clear that business confidence is improving leading to the overall increase in investment.

 

Consumer spending moderated during the fourth quarter, however it continues to be the workhorse of the economy accounting for 1.7 percentage point out of the overall growth of 1.9 percentage point during the quarter.  They have every reason to continue to spend. Employment gains are healthy, wages increases are accelerating, stock market has reached record territories and consumer confidence is high.

 

Core PCE, monitored by the Federal Reserve rose 1.3 percent in the fourth quarter. This is below central bank’s target of 2 percent, but the inflation trend is headed up giving comfort to the policy-makers in Washington. Under the circumstances, the FOMC could hike the interest rate three or four times this year assuming the Trump economic stimulus becomes a reality. It is unlikely that the FOMC would pull the trigger again after the hike last December. More likely, the Federal Reserve could raise the interest rate at the March FOMC meeting.   



 
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