US fourth-quarter GDP unrevised; weakness in business spending persists

A ship loaded with containers is pictured at Yusen Terminals (YTI) on Terminal Island at the Port of Los Angeles in Los Angeles, California, US, January 30, 2019. — Reuters pic
A ship loaded with containers is pictured at Yusen Terminals (YTI) on Terminal Island at the Port of Los Angeles in Los Angeles, California, US, January 30, 2019. — Reuters pic

WASHINGTON, Feb 27 — The US economy grew moderately in the fourth quarter, the government confirmed today, and is facing a bumpy road in early 2020 amid the fast-spreading deadly Covid-19 that has roiled financial markets.

Gross domestic product increased at a 2.1 per cent annualised rate, supported by a smaller import bill, the Commerce Department said in its second estimate of fourth-quarter GDP. That was unrevised from last month’s advance estimate and matched the growth pace logged in the July-September quarter.

The economy grew by an unrevised 2.3 per cent in 2019, the slowest annual growth in three years and missing the Trump administration’s three per cent growth target for a second straight year.

Financial markets have been spooked by fears that the coronavirus, which has killed more than 2,000 people, mostly in China, and spread to other countries, could undercut the longest US economic expansion on record, now in its 11th year.

Risky assets such as stocks have been sold off in favour of safe-haven government bonds. Money markets have boosted their bets on the prospect of more Federal Reserve interest rate cuts. The US central bank cut rates three times last year and has signaled its intention to keep monetary policy on hold at least through 2020.

Though there is so far no real evidence that the coronavirus epidemic is impacting the US economy, economists expect the struggling manufacturing sector to take a hit through supply chain disruptions and exports. Pain for the services sector could come via the travel and tourism industry.

 The stock market sell-off if it persists could erode consumer confidence and hurt consumer spending, which is already slowing. Economists also worry that corporate profits could come under pressure and lead to layoffs and a slowdown in hiring. The labour market is the economy’s main pillar of support.

President Donald Trump yesterday assured Americans the risk from coronavirus remained “very low,” and said public health officials were preparing to do “whatever we have to,” to deal with the outbreak.

Despite the unrevised reading to last quarter’s GDP growth, which was in line with economists’ expectations, consumer spending slowed more than previously reported. There were also downgrades to business investment and government spending.

That offset upward revisions to investment in homebuilding and inventory accumulation.

Weak domestic demand

Excluding trade, inventories and government spending, the economy grew at a 1.3 per cent rate in the fourth quarter, the slowest in four years. This measure of domestic demand was previously reported to have risen at a 1.4 per cent pace in the fourth quarter.

US financial markets were little moved by the data.

Business investment fell at a steeper 2.3 per cent rate in the fourth quarter, instead of the previously reported 1.5 per cent pace. It was the third straight quarterly decline and the longest such stretch since 2009. There were downward revisions last quarter to spending on equipment, mostly light trucks.

Investment in intellectual property products like software was also downgraded, offseting upgrades to spending on nonresidential structures such as mining exploration, shafts and wells. A second report from the Commerce Department today showed orders for non-defence capital goods excluding aircraft, a closely watched proxy for business spending plans, jumped 1.1 per cent last month, the largest gain since January 2019.

The signs of stabilisation in business investment are, however, likely to be tempered by the coronavirus. Business investment is also seen being pressured by Boeing’s decision to halt the production of its troubled 737 MAX plane starting last month.

Goldman Sachs on Sunday cut its first-quarter gross domestic product growth estimate by two-tenths of a percentage point to a 1.2 per cent annualised rate. Growth estimates for the January-March quarter were already on the low side because of Boeing’s biggest assembly-line halt in more than 20 years.

Growth in consumer spending, which accounts for more than two-thirds of US economic activity, slowed to a 1.7 per cent pace in the fourth quarter, instead of the previously reported 1.8 per cent rate. A strong rebound is unlikely, especially if the stock market rout spreads to the labour market. A separate report today showed applications for unemployment benefits increased 8,000 to 219,000 last week, though the underlying trend remained consistent with solid labor market conditions.

The decrease in imports in the fourth quarter, in part because of US tariffs on Chinese goods, compressed the trade deficit. Trade added 1.53 percentage points to GDP growth, rather than the 1.48 percentage points reported last month. That was the most since the second quarter of 2009.

Inventories rose at a US$13.0 billion (RM55 billion) rate in the fourth quarter, instead of the US$6.5 billion rate reported in January. Inventory investment sliced 0.98 percentage points from GDP growth last quarter. — Reuters

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