Growth slowest since 2016 as demand wanes

The U.S. economy turned in a weaker annual performance last year than in 2018, held back by developments that set the stage for slower growth to come.

Gross domestic product — which measures the value of goods and services produced inside the United States — grew at a 2.1% annual rate between October and December, the same as the previous three months, according to preliminary data released by the Commerce Department on Thursday.

A shrinking trade deficit resulting from a steep falloff in imports helped bolster the fourth quarter’s reading, as did a revived housing sector. Consumer spending expanded, but at a slower pace than during the summer.

Yearoveryear growth was 2.3% in 2019, compared with 2.5% a year earlier.

“In the bigger picture on 2019, growth was solid,” said Matthew Luzzetti, chief U.S. economist for Deutsche Bank Securities. But he said a key element, domestic demand, disappointed, growing by 2.2% as consumers and businesses pulled back on spending. That was the weakest figure since 1.8% in 2013.

In the second half of 2017 and in some of 2018, the annual growth rate surged past 3%, helped by hearty tax cuts and government spending. And it continued to sail ahead at the start of last year, reaching 3.1% between January and March.

But the stimulus effect faded, and that growth level now looks more like an aberration.

The economy has not expanded by 3% or more in a full calendar year since 2005.

Most economists now see normal growth circling the 2% mark.

The slowdown, in part, reflects a maturing labor market, where the jobless rate creeps along at halfcentury lows as the expansion heads toward its 11th anniversary and a hefty chunk of the population ages into retirement.

“Underneath what you’re seeing is slower domestic activity,” said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics. “It’s just the natural state of things.”

Federal Reserve officials have maintained a waitandsee approach on the economy, and on Wednesday left benchmark interest rates unchanged. The inflation rate has remained stubbornly below the Fed’s target of 2%.

One measure of inflation reported Thursday, the personal consumption expenditure index, was unexpectedly weak. Excluding the volatile categories of food and energy, the index increased just 1.3% on an annual basis.

“That was the biggest surprise in the report,” Luzzetti of Deutsche Bank said. Jerome Powell, the Fed chairman, has “become increasingly worried about persistently low inflation and feeding into lower inflation expectations,” he said, “so these data do put some additional pressure on the Fed around the middle of the year when they’re doing this policy review.”

Some key elements: Is the shrinking American trade deficit a win or loss? Imports fell sharply in September after the United States imposed tariffs on China because some U.S. companies held off buying goods, hoping that the Trump administration might soon strike a trade deal that reduced or removed the tariffs.

As tensions with China cooled in December, imports revived. And with a Phase 1 trade deal now signed, they might climb further in the months to come.

Rising imports push down GDP because the measure counts only the value of goods and services produced within a country’s borders. When a nation buys more things from abroad than it sells — the definition of a trade deficit — it pushes down GDP.

While the deficit excluding oil steadily climbed through most of President Trump’s tenure, it had fallen sharply in recent months before December’s figures came in.

The Trump administration has made lowering the U.S. trade deficit a goal. Economists, though, have opposed using the deficit as a scorecard: It can fall for a variety of reasons, and not all of them are good.

The deficit can fall because exports grow or shrink, or both. For example, a boom in manufacturing can reduce the deficit by pushing imported products out of the U.S. market and feeding a surge in exports — the outcome the Trump administration wanted to engineer.

But the deficit can also fall because the pace of the U.S. economy is slowing, making consumers less likely to buy imported goods and businesses less likely to invest in the United States. And that has been the situation in the United States, economists say.

“There is no evidence of those broader positive developments,” said Brad W. Setser, a senior fellow in international economics at the Council on Foreign Relations. “There is no growth in exports, and manufacturing is weak. So to the extent that tariffs have succeeded in bringing the trade deficit down, they have done so largely by reducing U.S. demand, not by raising U.S. production.” Many variables cloud the outlook. Businesses are hesitant to invest when they are unsure of what’s ahead.

According to Ben Herzon, executive director of U.S. economics at Macroeconomic Advisers, a forecasting firm, research shows that the “level of investment spending recently has been about $100 billion lower that it would have had there been no uncertainty about trade policy.”

That suggests there is room for more investment if trade policy settles.

Tensions with China have eased with the signing of the Phase 1 pact. And this week, Trump signed the new North American trade agreement with Canada and Mexico into law. But tariffs remain on twothirds of Chinese imports.

At the same time, trade frictions with Europe over tariffs, airplane subsidies, digital taxes and the World Trade Organization have ratcheted up.

Also unsettling is the outbreak in China and spread of a mysterious and deadly virus that has the potential to rattle investors, and slow growth in Asia.

On the domestic front, Trump’s impeachment trial in the Senate and the coming presidential election add another large dose of political uncertainty.

No matter who becomes the Democrats’ nominee, “we’re likely to have two candidates with very different views on tax, regulatory and trade policy,” Luzzetti of Deutsche Bank said. “Businesses don’t know which direction that’s going to go in, so they may hold back on spending projects.”

Luzzetti said the volatility in the data because of trade and Boeing would make it hard to gauge the underlying growth dynamics until midyear.

Services are driving growth, while manufacturing lags. Although wage growth and business investment have slacked off, consumers’ confidence in the economy has been unshaken. Optimism about the ease of finding a job helped fuel the rise in its most recent monthly measure of confidence, The Conference Board, a business research group, reported this week.

Consumer spending accounts for twothirds of economic activity, and enthusiasm drives growth.

The growth, though, is not spread evenly. “The manufacturing and service sectors are telling two slightly different stories,” said Emily Weis, macro strategist at State Street Corp., a large financial institution based in Boston.

While spending on services has remained strong, U.S. manufacturing has yet to revive, despite signs that it has stabilized abroad.

December was the fifth month in a row that the sector had declined. One large company, 3M, which makes Postit notes and a wide range of other consumer and office products, announced this week that it was laying off 1,500 people globally.

“Manufacturing has generally underwhelmed in the U.S.,” Weis said.

The Commerce Department will revise the fourthquarter results twice, as more data comes in.

One measure of inflation, the personal consumption expenditure index, was unexpectedly weak.