Steady as She Goes
The U.S. economy headed into 2020 on solid footing, with growth settling back to the roughly 2% pace that has prevailed during the decade-old economic expansion. Gross domestic product—the value of all goods and services produced across the economy—rose at a seasonally and inflation-adjusted annual rate of 2.1% in the fourth quarter and 2.3% across all of 2019. The economy’s expansion last quarter reflected a boost from trade, a slowdown for consumer spending, a contraction in business investment and a welcome pickup in the housing market.
Well, How Did I Get Here?
It was a good year for the conventional wisdom. A year ago the Congressional Budget Office and Federal Reserve thought gross domestic product would expand 2.3% in 2019. The private sector projected 2.2%. The final number: 2.3%. Of course, the path was somewhat tortuous. It took three interest rate cuts by the Fed, along with the 2018 tax cut, to keep household consumption growing strongly and turn housing from a drag in 2018 to a minor boost in 2019. Federal spending also made a substantial contribution. Goods exports and business investment were big disappointments, both declining over the course of the year. The Trump administration expected both to benefit from its trade and tax policies; its own forecast of 3.2% economic growth was badly off the mark. (That projection also assumed all of its policies would pass Congress, which didn’t happen). If global growth picks up, trade tensions ease and Boeing’s 737 Max returns to the air, 2020 should be better. —Greg Ip
Home sweet home. The housing sector finished strong. Residential fixed investment—purchases of private residential structures and equipment—advanced at a 5.8% pace, the strongest in two years. The housing sector was a drag on growth in 2018 and the first half of 2019 but that’s reversed. The Federal Reserve’s interest-rate cuts likely supported the market.
Sign of caution. Consumer spending slowed. Personal consumption expenditures advanced at a 1.8% pace during a period of healthy job growth and steady wage gains, suggesting a degree of caution among households. Even so, consumer spending remained a mainstay of economic growth during the quarter.
Ugly. Business investment faltered—again. Nonresidential fixed investment fell for the third consecutive quarter. That’s the longest contraction since the great recession and suggests GOP tax cuts didn’t lead to the kind of sustained spending boom advocates had touted. There was one bright spot in the underlying details: Companies have been spending on software, an investment that could pay off with increasing productivity in the future.
Trade winds. Trade provided the biggest boost to economic growth in a decade. The way GDP is calculated, exports add and imports subtract from the final tally. Last quarter, exports advanced a little and imports collapsed. The result: “Net trade represented the largest optical illusion in the GDP report, providing an artificial boost to GDP growth of 1.5ppts,” said Oxford Economics economist Gregory Daco.
I’m from the government, and I’m here to help. U.S. government spending has been a consistent driver of growth during the Trump administration. Federal expenditures and investment have added to GDP for 11 straight quarters, the longest such stretch since the recession and its immediate aftermath. Year over year, federal spending and investment is growing at the fastest pace since 2010. “The federal government is trying desperately to spend us back to 3% growth and that simply cannot continue,” said Naroff Economic Advisors economist Joel Naroff.
Final word. The latest numbers will get revised. But as of now, President Trump still hasn’t hit 3% annual growth. GDP advanced 2.3% in 2019—whether you measure it from fourth quarter to fourth quarter or stack one full year against the next.
WHAT ECONOMISTS ARE SAYING
“The economy isn’t firing on all cylinders, but it also doesn’t appear to be at risk of stalling out either.” —Jim Baird, Plante Moran Financial Advisors
“With the economy as stable as it is, it would take a very large shock indeed to materially alter the economy’s basic trajectory.” —Eric Winograd, AllianceBernstein
“Today’s GDP report offers a bit of optimism and tells us that the economy still has plenty of fight left in it right now.” —Steve Rick, CUNA Mutual Group
“The most recent three quarters mark the economy’s worst performance since the 2016 slump.” —Gregory Daco, Oxford Economics
“Underlying fundamental estimates of growth showed an economy that continues to chug along at a slow and steady pace.” —Joseph Brusuelas, RSM US