Sunday, 18 of February of 2018

Economics. Explained.  


January 26, 2018

The first look at fourth quarter GDP growth came in at 2.6% which was a bit less than the 3.0% pace that had been expected.  However, the shortfall was confined to the change in business inventories which are very volatile from one quarter to the next.  The 2.6% fourth quarter GDP increase compares to a 3.2% growth rate in the third quarter.  Keep in mind that this early GDP estimate will be revised two more times, once at the end of next month, and again at the end of March.  For 2017 as a whole GDP rose 2.5%.

Final sales, which is GDP excluding the change in business inventories grew at a solid 3.2% pace in the fourth quarter compared to a 2.4% rate in the third quarter.   Over the past year final sales have risen 2.8%.  In the fourth quarter inventories rose $9.2 billion compared to an increase of $38.5 billion in the third quarter.  Thus, inventories  subtracted 0.6% from  GDP growth in the fourth quarter.  Inventories are expected to rise by roughly $27 billion per quarter in the quarters ahead.

Final sales to domestic purchasers excludes both the change in inventories and trade jumped by 4.3% in the fourth quarter versus an increase of 1.9% pace in the third quarter.  Over the past year this series has risen at a 2.8% pace.  The deficit for net exports widened by $55.1 billion which means that the trade component subtracted 1.1% from GDP growth  in the fourth  quarter as exports rose 6.9% while imports surged by 13.9%.  The jump in imports probably represents a rebound following an inability to offload merchandise in the Houston area in the third quarter in the wake of Hurricane Harvey.

Consumption spending rose 3.8% in the fourth quarter after having risen 2.2% in the third quarter.  Growth in this category was almost certainly biased downwards in the third quarter by two hurricanes followed by a rebound in the fourth quarter.  We expect the pace of consumer spending to remain steady and  increase 2.8% in 2018.  Solid employment gains should boost  income.  The rising stock market will boost net worth.  Expected individual income tax cuts should further stimulate spending.  Everything related to the consumer seems quite solid.

Nonresidential investment climbed by 6.8% in the fourth quarter after rising 4.7% in the third quarter.  For 2017 nonresidential investment climbed 6.3%.  We expect nonresidential investment to  increase  7.0% in 2018 as business regains confidence in the wake of expected corporate tax cuts, relief from an onerous regulatory burden,  and some repatriation of earnings from overseas.

Residential investment jumped 11.1% in the fourth quarter after having declined 4.7% in the third quarter.   The third quarter drop was probably exacerbated by the hurricanes and the fourth quarter reflects the rebound.  For 2017 as a whole residential investment rose 2.3%    While demand remains strong, builders are having an increasingly difficult time finding qualified workers which curtails growth in this category.   We expect residential investment to  increase 3.5% in 2018.

The foreign sector as measured by the deficit for real net exports widened by $55.1 billion in the fourth quarter to -$652.6 after having narrowed by $16.1 billion in the third quarter.  Exports rose 6.9% while imports jumped by 13.9%.  We expect the deficit for net exports to neither add to nor subtract from GDP growth in 2018.

Federal government spending rose 3.5% in the fourth quarter after having risen 1.3% in the third quarter.  Federal government spending is expected to rise 1.8% in 2018 as President Trump increases defense spending while non-defense spending is relatively unchanged.

Following GDP growth of  2.5% in 2017 we expect growth of  2.9% in 2018 given the individual and corporate tax cuts and some repatriation of earnings from overseas.

Stephen Slifer


Charleston, SC

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