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GDP Report Shows US Economy Still Strong, but Momentum Could be Slowing

GDP Report Shows US Economy Still
Photo credit: Bureau of Economic Analysis

It was mixed signals coming out of The Commerce Department’s fourth quarter real gross domestic product (GDP) report released Wednesday, with an upgrade to previous estimates but a deceleration from third quarter growth. There’s also been a decline in corporate profits.

GDP increased at an annual rate of 2.9% in the fourth quarter of 2017, according to Commerce’s Bureau of Economic Analysis (BEA), a falloff from the 3.2% real GDP registered in the third quarter.

The deceleration in real GDP growth in the fourth quarter reflected a downturn in private inventory investment and an increase in imports, which are a subtraction when calculating GDP. The dip was partly offset by accelerations in personal consumption expenditure (PCE); exports; state, local and federal government spending; nonresidential fixed investment and residential fixed investment, according to BEA.

Real gross domestic income (GDI) rose 0.9% in the fourth quarter, compared with an increase of 2.4% in the third quarter. The average of real GDP and real GDI, which serves as a supplemental measure of U.S. economic activity, increased 1.9% in the fourth quarter, compared with an increase of 2.8% in the third.

The price index for gross domestic purchases increased 2.5% in the quarter compared with an increase of 1.7% in the third quarter. The PCE price index increased 2.7% compared with an increase of 1.5% quarter-to-quarter.

“While we had been anticipating an upward revision to fourth-quarter consumer spending growth following the Quarterly Services Survey report released earlier this month, the revision in today’s report was smaller than we had anticipated. This suggests less momentum for consumer spending in the first quarter, so we lowered our forecast of first quarter spending growth one-tenth to 1.4%,” Kathleen Navin, director of U.S. economics at Macroeconomic Advisers by IHS Markit, said.

Navin said the downward revision to first quarter spending growth lowered the IHS Markit forecast of first quarter GDP growth by one-tenth to 1.7%.

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“Still, today’s report shows a strong U.S. economy as of the fourth quarter,” Navin said. “Growth of final sales to private domestic purchasers in the fourth quarter was revised up two-tenths to 4.8%, the highest reading in over three years and close to the highest since 2006.”

For all of 2017, real GDP increased 2.3% compared with an increase of 1.5% in 2016, BEA reported. The increase primarily reflected positive contributions from PCE, nonresidential fixed investment and exports, balancing declines in private inventory investment and an increase in imports.

Textile and apparel imports to the U.S. rose 3.2% in 2017 to 64.89 billion square meter equivalents and gained 1.27% to $106 billion in value terms.

The price index for gross domestic purchases increased 1.8% in 2017, compared with a 1 percent rise in 2016. The PCE price index increased 1.7% in the year compared to a 1.2% gain in 2016.

In another indicator sign of a slowing economy, profits from current production–corporate profits with inventory valuation adjustment and capital consumption adjustment–decreased $1.1 billion in the fourth quarter, in contrast to an increase of $90.2 billion in the third quarter.

Profits of domestic financial corporations fell $14.6 billion in the fourth quarter, in contrast to an increase of $47.8 billion in the previous period. Profits of domestic nonfinancial corporations increased $19.4 billion compared to a $10.4 billion increase in the prior quarter.

In the full year, profits from current production increased $91.2 billion, in contrast to a decrease of $44 billion in 2016. Profits of domestic financial corporations increased $15.7 billion, compared to a decrease of $2 billion in 2016. Profits of domestic nonfinancial corporations increased $37.4 billion, in contrast to a decrease of $51.7 billion year-to-year.

BEA said the 2017 Tax Cuts and Jobs Act includes several provisions that impact the business income and personal income statistics in the national income and product accounts. The provisions do not impact corporate profits for current production or GDI, but do impact net cash flow in the fourth quarter of 2017.