Fourth Quarter GDP Report – Steady Overall Growth but Key Sectors Slowing

Fourth Quarter GDP Report 1 30 20

Gross Domestic Product (GDP) grew by 2.1% in the third quarter of 2019, in line with economists’ expectations. However, slowing growth trends persist among several key sectors including consumer spending and business investment. Despite record-low unemployment, strong cyclical wage growth, and a very high absolute level of consumer confidence, consumer spending growth slowed further in Q4 to 1.8% from 3.2%. Consumer spending’s 1.2% contribution to GDP in Q4 represents the second lowest in the last seven quarters. 

Business investment growth remained negative in the quarter (-1.5%) as business confidence was weak. Confidence may begin to improve as trade deals develop. One positive from business investment is the persistent growth of intellectual property spending by businesses (software and other technology-related products). This area has now contributed to GDP growth in 15 of the last 16 quarters. 

Residential housing contributed to GDP growth for the second straight quarter and sector growth ticked up to 5.8% from 4.6%. One main driver of this strengthening comes from lower mortgage rates, which has kept affordability in check.

Net exports contributed 1.5% to GDP, an abnormally high rate. This is somewhat misleading, though. It was driven by a modest increase in export growth from 1.0% to 1.4% and a huge drop in import growth from 1.8% to -8.7%. Needless to say, the contribution from net exports is not sustainable and lessens the quality of Q4 GDP growth. 

Lastly, government spending grew 2.7% and contributed 0.5% to GDP growth. This also should be taken with a grain of salt given its lack of sustainability. 

In all, stripping out the more volatile and unsustainable government spending and net exports growth, GDP growth continues to slow.  Consumer spending, which represents two-thirds of U.S. demand, needs to improve for the economy to regain strength.