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
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.