– March 28, 2018

Revised estimates show real GDP grew at a 2.9 percent pace in the fourth quarter compared to a 3.2 percent pace in the third quarter and 3.1 percent in the second. For all of 2017, real GDP rose 2.3 percent versus a 1.5 percent rise in 2016 and 2.9 percent increase in 2015. The latest report on the economy also shows core consumer prices rose at a modest pace in the fourth quarter, increasing 1.9 percent. Corporate profits did show a decline in the fourth quarter; however, most elements of the report suggest economic activity remains robust with moderate real growth and tepid price increases.

Most of the major components of GDP made positive contributions to growth in the quarter. Real personal consumption expenditures grew at a revised 4.0 percent pace, well above the 2.2 percent gain in the prior quarter. Spending on the durable-goods component of personal consumption expenditures accelerated to 13.7 percent from 8.6 percent in the third quarter while spending on consumer services and nondurable goods accelerated to 2.3 percent from 1.1 percent and 3.8 percent from 2.4 percent, respectively.

Business fixed investment in equipment posted a 1.7 percent rise after a 1.1 percent rise in the third quarter. Equipment spending has had five consecutive quarters of improving growth, including a 2.8 percent gain in the fourth quarter. Business investment in intellectual property products rose 0.2 percent in the fourth quarter after a 1.3 percent gain in the third quarter. Spending on nonresidential structures rose 1.6 percent in the fourth quarter after a 1.8 percent decline in the prior period. Residential investment (housing) returned to growth, rising 3.1 percent after two consecutive declines.

Private domestic demand, which is the sum of personal consumption expenditures, business investment, and residential investment (housing), surged to a 4.8 percent pace in the fourth quarter (see chart), the 32nd consecutive quarter of growth. Private domestic demand has been the main driver of growth for much of the current expansion. Fundamentals driving private domestic demand remain very solid and are likely to support healthy growth over the next several quarters.

Among the other major components of GDP, net trade, the difference between exports and imports, made a negative contribution of 1.16 percentage points to overall GDP growth. Within net trade, exports rose 2.1 percent, adding 0.83 percentage points to growth, while imports jumped 14.1 percent, subtracting 1.99 percentage points from real GDP. Private inventories fell by $22.9 billion in real terms, after increasing by $33.0 billion in the prior quarter. The swing from inventory accumulation to liquidation subtracted 0.53 percentage points from the final GDP growth rate. Finally, real government spending rose 3.0 percent versus a 0.7 percent increase in the third quarter. Federal spending rose 3.2 percent, led by a 5.5 percent rise in defense that was partially offset by a 0.1 percent decline in nondefense. State and local government spending rose 2.9 percent in the fourth quarter following a 0.2 percent increase in the prior quarter.

Despite strong growth from domestic demand, corporate profits fell slightly in the fourth quarter. For the economy in aggregate, after-tax corporate profits excluding inventory-valuation adjustments and capital-consumption adjustments — both used in national income accounting — were $1.68 trillion at a seasonally adjusted annual rate in the fourth quarter, down from $1.86 trillion in the prior quarter. That represents a 6.0 percent drop from the fourth quarter of 2016. Despite the weak quarter, the outlook for corporate profits remains positive, and when combined with solid growth in demand, low cost of capital, and generally healthy balance sheets for the corporate sector, the outlook for business fixed investment remains healthy as well.

The fourth key aspect of the latest report on the broad economy is the continued tepid increases in prices. The overall GDP price index rose at a 2.3 percent pace compared to 2.1 percent in the third quarter. Over the last four quarters, the GDP price index is up a more mild 1.9 percent. PCE prices, the measure preferred by the Fed, rose 2.7 percent in the fourth quarter. From a year ago, the PCE price index is up 1.7 percent while the core PCE price index, which excludes volatile food and energy items, is up just 1.5 percent. The core PCE price index has been rising at less than 2 percent for most of the past 20 years. That stretch of sub-2 percent increases is about as close to price stability as the United States has ever experienced.

Overall, economic data suggest an economic environment with solid growth and slow price increases that is likely to continue well into 2018.

Robert Hughes


Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.

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