US growth slows to 2.5% in Q4 as imports surge
WASHINGTON (Reuters) – US economic growth slowed slightly more than initially thought in the fourth quarter after the strongest pace of consumer spending in three years depleted inventories and drew in imports as businesses struggled to produce enough goods and services.
Gross domestic product expanded at a 2.5 percent annual rate in the final three months of 2017, instead of the previously reported 2.6 percent pace, the Commerce Department said in its second GDP estimate on Wednesday. That was a deceleration from the third quarter’s brisk 3.2 percent pace.
The downward revision to the fourth-quarter growth estimate largely reflected a smaller inventory build up than previously reported. The reliance on imports to satisfy domestic demand could further widen the trade deficit and blunt the anticipated economic boost from a $1.5 trillion tax cut package and increased government spending.
Domestic demand grew at an unrevised 4.6 percent rate in the fourth quarter, the fastest pace in more than three years.
“An economy that is at or beyond full employment ... cannot match this pace of demand growth and, therefore, must either sell from inventory and/or purchase from abroad,” said John Ryding, chief economist at RDQ Economics in New York.
The trade deficit is likely to worsen in the first quarter. Data on Tuesday showed the goods trade deficit widened sharply in January as exports fell, pointing to slower economic growth in the first three months of the year.
The moderation in GDP was also underscored by other reports on Wednesday showing factory activity in the Midwest slowing to a six-month low in February and contracts to purchase previously owned homes tumbling 4.7 percent in January to the lowest level since October 2014.
Retail sales, home sales, durable goods orders and industrial production have also declined in January.
First-quarter growth tends to be weak because of a seasonal quirk, but output is likely to accelerate for the rest of 2018 as the fiscal stimulus kicks in. GDP growth estimates for the January-March period are as low as a 1.8 percent rate.
The economy grew 2.3 percent in 2017, an acceleration from the 1.5 percent logged in 2016.
Economists believe the economy will hit the Trump administration’s three percent annual growth target this year, possibly putting pressure on the Federal Reserve to raise interest rates more aggressively than currently anticipated.
Fed chairman Jerome Powell struck an upbeat note on the economy before US lawmakers on Tuesday, saying “my personal outlook for the economy has strengthened since December.” Powell also acknowledged that “fiscal policy is becoming more stimulative.” Those remarks prompted traders to raise their bets on four rate increases this year. The Fed has forecast three rate hikes for 2018. Financial markets expect the first increase to come in March.