Growth Slower Than Expected, But Better Than Feared

The headline figure from Thursday's report on gross domestic product (GDP) may have overstated the strength of the US economy in the fourth quarter. However, the economy was still not in bad shape, and this year may not be as bad as some people think.

The Commerce Department reported that GDP grew at an inflation-adjusted 2.9% annual rate in the fourth quarter from the previous quarter, which is slightly better than what economists had expected. This is just a touch lower than the third quarter’s 3.2% growth. The slight decline in GDP that we saw in the first half of last year now feels like a distant memory.

A closer look at the GDP report reveals a more mixed picture. Consumer spending was strong, growing at a 2.1% rate compared to 2.3% in the third quarter. However, there was a significant slowdown in capital spending, with nonresidential private fixed investment growing at just a 0.7% rate. And the housing market continued to weigh on the economy, with residential investment falling at a 26.7% rate—enough on its own to drag GDP growth down by about 1.3 percentage points.

In addition, two often volatile categories boosted GDP last quarter. The first was inventories. They grew after contracting in the third quarter, and this restocking effectively meant businesses were producing more than they needed to merely meet demand. This boosted GDP growth by nearly 1.5% percentage points. The second was trade. U.S. exports slipped a bit in the fourth quarter, but imports declined by more. The narrowing of the trade deficit added almost 0.6 percentage point to growth.

Sales to private domestic purchasers grew at a very slow rate of 0.2% per year. This category excludes the effects of inventory swings, trade and government spending, and is seen by economists as a more accurate reflection of the trend in demand.

The Federal Reserve's recent interest rate hike could mean trouble for the economy this year, as it will make borrowing more expensive. However, there are also some positive aspects to the economy that could help offset this.

The first factor is the job market. Although the number of large public companies announcing layoffs has been increasing, overall demand for workers still seems strong. The Labor Department reported that a seasonally adjusted 186,000 jobless claims were filed in the week ended Saturday, which is down from the previous week’s 192,000. If employment doesn’t falter, people will be able to keep spending.

Trade is another area that can be volatile, but one reason imports slipped in the fourth quarter may be that as pandemic worries fade, Americans are spending more on services rather than goods produced abroad. Although much of the world is still facing challenges, there have been some signs of improvement recently, such as lower energy prices helping European economies. This could in turn boost U.S. exports, as services make up a significant portion of what the U.S. exports.

It is expected that the housing market will have another difficult year; however, it is not anticipated to be as bad as it has been in the recent past. Mortgage rates have fallen since last autumn and home builders have not sounded as pessimistic recently. Therefore, while housing is not expected to make a large contribution to the Gross Domestic Product, it is not anticipated to continue to drag it down as it did last quarter.

There are plenty of economic challenges that lie ahead in the coming year. However, there are also potential obstacles to a recession.