The American economy grew by 2.6% (annualized) in the fourth quarter according to the BEA’s advance estimate, slightly below market expectations for a 3% print, but a very solid result nonetheless.
As expected, consumers led the way, as spending rose 3.8%, rebounding from a hurricane-dampened 2.2% pace in the third quarter. Purchases of durable goods were the big story, rising 14.2% driven by strong growth in motor vehicles. The need to replace cars damaged by late summer hurricanes boosted purchases in the fourth quarter. Moreover, non-durable goods spending was also likely boosted by hurricane-related restocking, up 5.2%, while services spending accelerated more modestly to 1.8%.
Business investment had an impressive quarter, up 6.8%. Spending on equipment rose 11.4%, improving on the significant momentum that built through 2017. Growth in intellectual property outlays rose 4.5%, while non-residential structures rose a more modest 1.4%.
Residential investment snapped two-quarters of contraction rising 11.6%. Residential structures were impacted by disruptions related to Hurricanes Harvey and Irma in the third quarter, with activity clearly rebounding in the fourth quarter.
With domestic demand running full tilt, imports also rebounded 13.9%, after two quarters of unexpected weakness. Exports were also up a solid 6.9%, but that wasn’t enough to keep net exports from exerting a significant drag on growth. Net exports subtracted 1.1 percentage points from growth as a whole, after adding 0.4 percentage points to real GDP growth in the third quarter.
Inventory investment was also a drag on headline growth, subtracting 0.7 percentage points from the headline figure.
Key Implications
The headlines may read that GDP growth was below expectations in the fourth quarter of 2017, but with final domestic demand up 4.3% in the quarter, it is hard to see any real disappointment in today’s report. Smoothing out the quarterly ups and downs, the U.S. economy was running at a healthy 2.5% pace year-on-year to end 2017. This is well-above the economy’s potential growth rate (around 2.0%) and is consistent with ongoing declines in the unemployment rate, which at 4.1% is already below its estimated long-run level.
It also shows that the U.S. economy was doing quite well even before the Tax Cuts and Jobs Act came into play. The TCJA is expected to provide a modest boost to the U.S. economy over the next few years. However, with unemployment already so low, it is also likely to spark higher inflation and speed the pace of Fed rate hikes slightly.
The Fed already knew that the economy had healthy momentum to end 2017, but the hard numbers give further comfort and support the case for another rate hike in March.
 and is consistent with ongoing declines in the unemployment rate, which at 4.1% is already below its estimated long-run level. ){kind=link}