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  Dr. Sohn's Commentary

Economic Growth 4th Quarter 2017

January 26, 2018

Economic growth during the final quarter of 2017 has slowed to an annual rate of 2.6 percent, down from 3.2 percent during the third quarter. Excluding inventories, final sales grew at an annual rate of 3.2 percent. Consumption, investment, housing and equipment investment have strengthened offset by weaknesses in net exports and inventory accumulation. The inflation rate (PCE) accelerated to 2.8 percent from 1.5 percent and the core rate also sped up to 1.9 percent from 1.3 

Despite the weaker-than-expected performance during the fourth quarter, the overall tone of the economy is very healthy. Consumers were on a spending spree during the quarter buying everything from cars to iPhones. The healthy holiday shopping season assured that consumer spending played a major role in supporting economic growth during the fourth quarter. Auto sales were a significant factor driving sales during the quarter. However, higher gasoline prices were a bit of a damper on the spending. The best performance in more than a year will continue as the Trump tax cut , the booming stock market and rising employment stoke consumer spending.

Not to be outdone by the consumers, businesses jumped in with whopping spending on equipment to raise productivity and cut costs. With the tax cut, business spending is nowhere to go but up in the future. However, there are some headwinds for businesses. The economy is suffering from skilled labor shortages which are vital for healthy economic growth. Homebuilders can’t build homes because carpenters and plumbers are hard to find. Software engineers are almost impossible to find in Silicon Valley.

Government spending, both Federal and State & Local, rose at a healthy pace reflecting the continuing spending in the aftermath of the hurricanes. In the new year, the spending should taper off.

The strong consumer spending was also the sources of economic weakness during the quarter. Consumers’ insatiable appetite sucked in a lot of imports at a double-digit rate subtracting 1.13 percentage growth from economic growth during the quarter. One plus was that exports did nicely, though not enough to offset the surge in imports, as the global economic growth boosted demand for U.S. goods and services.

The healthy economy has spilled over into housing. With more jobs and income, the demand for housing is good. Rents now exceed the monthly payments on median-priced homes boosting demand for houses. With limited new construction over the past few years, inventories are at a very low level. The housing affordability, though trending down, is still supportive of home sales.

A good news for the new Chairman of the Federal Reserve, Jerome Powell, is the healthier inflation picture. PCE, the preferred inflation gauge of the central bank, accelerated to 2.8 percent well above the target of 2 percent. The core component of the index also accelerated to 1.9 percent from 1.3 percent pointing to more hikes in the interest rate in 2018. Four, not three, increases should not be ruled out.

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