Q4 GDP Provides Backdrop for Stronger 2018 Growth Story

At the end of 2018, the stock market was in freefall mode due to slower economic readings and fears that earnings growth was about to dry up. The federal government shutdown also created many problems, including delays in the release of many government-issued economic reports. And the fear was growing that gross domestic product (GDP) was slowing to a crawl ahead of the tariffs and trade war fears. Due to the partial shutdown, this GDP report replaced the advanced report and the first revision.

The U.S. Department of Commerce reported that the economy grew by 2.6% in the fourth quarter of 2018. Dow Jones was calling for a gain of 2.2%. That estimate likely would have been lower had this report been issued four to six weeks ago.

While this is better than expected, the reality is that this is still shy of the 3.4% growth recorded in the third quarter of 2018 and the 4.2% posted in the second quarter.

The Commerce Department also reported that the so-called current-dollar GDP increased by 4.6%, or $233.2 billion, to a level of $20.89 trillion in the fourth quarter. That compares with a current dollar GDP gain of 4.9%, or $246.3 billion, in the third quarter. The price index for gross domestic purchases increased by 1.6% in the fourth quarter, versus a 1.8% gain in the third quarter.

One area of weakness was from softness in consumer spending and in the housing market. Recall that roughly two-thirds of U.S. GDP comes from consumer spending activities. That said, consumer spending was measured as being up 2.8% in the fourth quarter of 2018.

Nonresidential fixed investment rose by a sharp 6.2% in the fourth quarter, after having risen just 2.5% in the third quarter. That measurement includes business investment and spending on structures, equipment, software, R&D and so on. Residential investment fell by 3.5% in the fourth quarter of 2018.

Exports also rose by 1.6% in the fourth quarter, following a drop of 4.9% in the third quarter. Petroleum and capital goods exports accounted for the gains there.

The broader growth for the year showed a 2.9% annual GDP increase over 2017. That was the strongest growth since 2015. Two figures stood out for the annual report showing full-year 2018 versus 2017:

  • Real GDP increased 2.9% in 2018 over 2017, and that was compared to an increase of 2.2% in 2017.
  • Current-dollar GDP increased 5.2%, or $1.02 trillion, in 2018 to a level of $20.50 trillion, compared to a 2017 gain of 4.2% ($778.2 billion) in 2017.

One more issue to consider is that the contribution from inventories was just 0.15% of the total GDP growth. That figure had been over 2.3% in the third quarter. If businesses end up deciding that they need to replenish inventories more for the year ahead it could actually act as a boost to GDP and overall production gains in 2019. Then again, any additional slowing might take that the other way.

It is important to understand what has happened in the markets versus the broader economy in 2019. Year to date, the Dow Jones industrials and the S&P 500 are both up over 11% on last look, and almost every week has been an up-week for the broader market indexes. Economic numbers have shown growth at a more muted pace, and the Federal Reserve finally figured out that it was being far too aggressive with hiking interest rates and telegraphing future rate hikes.

Despite a solid gain in the fourth quarter, many economists, market watchers and even Federal Reserve officials have called for slower growth in 2019. Much of that outcome will, of course, depend on the outcome of China tariff and trade issues being negotiated. A few dozen political and geopolitical issues are all potential drags.