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The U.S. economy advanced at 2.6% annual pace in the fourth quarter, a quiet end to a solid year of growth. Greg Ip and Jeff Sparshott here to take you through some of the report’s highlights and what it means for 2019.
KEY THEMES
ECONOMY HITS TRUMP’S 3% TARGET (FOR NOW)
President Trump promised 3% growth. Measured one way, last year didn’t deliver: Gross domestic product rose 2.9% in calendar 2018 over 2017, matching the increase in 2015. Measured another way, it did: GDP rose 3.1% in the fourth quarter from a year earlier, the best since 2005. While both are valid, Mr. Trump’s budget, Fed officials’ quarterly projections and the Journal’s survey of private economists emphasize fourth quarter over fourth quarter. So Mr. Trump is well within his bragging rights. But only partly. He promised sustained 3% growth, and it’s doubtful last year’s pace can be sustained. Much of it was thanks to the tax cut and federal spending boost, which won’t be repeated, and to employment growing twice as fast as its underlying demographic trend. So long-term growth of 3% still looks out of reach–although it may do better than the sub-2% rate many economists expect.
BUSINESS, CONSUMERS LEAD THE ECONOMY
GDP grew 2.6% annualized in the fourth quarter, slower than 3.4% in the third quarter but better than the 2.2% private economists expected. Business investment accelerated to a 6.2% rate from 2.5% in the third. Personal consumption advanced at a brisk 2.8% rate. The U.S. Bureau of Economic Analysis said the partial government shutdown, which began on Dec. 22, knocked about 0.1 percentage point off of fourth quarter growth.
THINK BIG
Business investment in software and research and development was especially strong last year. Nonresidential fixed investment in intellectual property rose 7.7% from 2017 to 2018, the best annual gain since the tech heyday of the late 1990s. In addition to software and R&D, the category includes entertainment, literature and art, but those made a fairly small contribution last year. The strong growth in intellectual property investment accounted for much of the upside surprise to fourth quarter growth, says Julia Coronado of MacroPolicy Perspectives.
Bonus: “Strong growth in intellectual property…will drive trend productivity growth and in turn potential GDP growth higher over time, a positive supply-side boost to the economy,” says Amherst Pierpont’s Stephen Stanley.
THE SLOWDOWN WILL CONTINUE
Growth peaked in the second quarter at 4.2% and has slowed every quarter since, and probably will do so again in the current quarter. Macroeconomic Advisers is expecting growth of 1.1% in part because inventories rose sharply over the fourth quarter, foreshadowing less in the first. J.P. Morgan thinks consumption fell over the course of the quarter, contracting 0.4% in December from November, establishing a weak trajectory for the first. Private economists surveyed by the Journal expect the economy to grow 2.2% this year.
NOT A PAUSE-FRIENDLY REPORT
The details of the fourth-quarter GDP report did not exactly vindicate the Federal Reserve’s decision to signal an end to interest-rate increases. The economy continued to grow well above its long-run potential rate of just below 2%, led by the components most sensitive to financial conditions and fiscal policy: consumption and business investment. Inflation, as measured by the core price index for personal consumption, was a slightly stronger than expected 1.7%, annualized.
WEAK SPOTS
The biggest drags in the fourth quarter were a widening trade deficit and slumping housing market. Housing, especially, isn’t gaining any traction.
REPEAT PERFORMANCE
The White House is confident economic growth will top 3% this year, Council of Economic Advisers Chairman Kevin Hassett told The Wall Street Journal Thursday. President Trump’s top economist welcomed the 3.1% year-over-year rate of economic growth in the fourth quarter of 2018, saying that “the impact of the tax cut on GDP pretty much nailed it.”
“We fully expect [gross domestic product in 2019] to be in the 3% range again,” he said.
WHAT ECONOMISTS ARE SAYING
In all, today’s report was positive and shows that domestic demand continues to anchor growth. —Pooja Sriram, Barclays
As the stimulus fades and the lagged impact of past monetary tightening continues to feed through, we expect GDP growth to slow to 2.2% this year and only 1.2% in 2020. —Paul Ashworth, Capital Economics
The stronger-than-expected GDP outturn should alleviate some concerns that the economy is in serious trouble. —Jay Bryson, Wells Fargo
We see four reasons for more modest growth in 2019 versus 2018: a fading fiscal stimulus; tighter financial conditions; increasing protectionism and slowing global activity. We foresee the U.S. economy growing a more moderate 2.1% in 2019. —Kathy Bostjancic and Jake McRobie, Oxford Economics
TWEET OF THE DAY
[wsj-responsive-sandbox id = "0" ]from Real Time Economics https://ift.tt/2tJCZGW
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