Economy lags forecast, but doing fine

Consumer spending jumps 3.8 percent; business investment grows.

Despite fourth-quarter U.S. growth missing forecasts, the world’s largest economy is doing just fine. The results also underscore just how challenging it will be to reach President Donald Trump’s goal of a sustained 3 percent pace.

The 2.6 percent annualized gain in gross domestic product, reported by the Commerce Department on Friday, fell short of the Bloomberg survey median projection of 3 percent. Yet consumer spending, the biggest part of the economy, jumped 3.8 percent, the best in more than a year; business equipment investment grew at the fastest pace in three years; and housing made a strong contribution.

The more-volatile categories of trade and inventories together lopped 1.8 percentage points off growth.

The results show solid support from various sectors of the economy, and the president’s move to cut taxes will help underpin demand. Nonetheless, the pace of household purchases is unlikely to repeat the recent performance amid still-modest wage gains and higher debt loads.

The report also shows how a widening trade gap can take a bite out of GDP. Strong domestic demand boosted imports. Exports failed to keep pace even with a global growth pickup and a weaker dollar. Federal Reserve interest-rate increases also could limit expansion.

“The details are much better than the headline,” said Tom Simons, senior economist at Jefferies. “The more fundamental elements of growth were quite strong in the fourth quarter. Both on the consumer and the business side, there is a lot of momentum.”

At the same time, he said, “Trade might be a more persistent weakness.”

Had GDP met forecasts, it would have been the third straight quarter of 3 percent-or-better growth, the longest streak since 2005. Higher business confidence since Trump was elected has probably played a role in driving more corporate investment, which is expected to continue rising, in part due to lower taxes. A widening trade deficit — the gap for merchandise in December was the biggest since 2008 — may feed into Trump’s pledges to reduce such imbalances.

To get a better sense of underlying domestic demand, economists look at final sales to domestic purchasers, which strip out inventories and trade, the two most volatile components of GDP. Such sales grew 4.3 percent last quarter, the most since 2014, after a 1.9 percent increase.