U.S. economic growth slowed slightly more than initially thought in the fourth quarter as the strongest pace of consumer spending in three years drew in imports and depleted inventories.
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 GDP growth estimate largely reflected a smaller inventory build than previously reported. It was in line with economists’ expectations.
The economy appears to have lost further momentum at the start of the year, with recent data showing retail sales, home sales, durable goods orders and industrial production declining in January. In addition, the goods trade deficit widened last month as exports fell.
First-quarter growth tends to be weak because of a seasonal quirk but is likely to accelerate for the rest of 2018 as the stimulus from a $1.5 trillion tax cut package and increased government spending kicks in. GDP growth estimates for the first three months of the year are as low as a 1.8 percent rate.
Economists believe the economy will hit the Trump administration’s 3 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 U.S. 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.
The economy grew 2.3 percent in 2017, an acceleration from the 1.5 percent logged in 2016. A measure of domestic demand expanded at its quickest since the third quarter of 2014, highlighting the economy’s strength.
Prices of longer-dated U.S. Treasuries were trading higher after the data. The dollar .DXY rose against a basket of currencies and U.S. stock index futures were higher.
ROBUST CONSUMER SPENDING
Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, was unrevised at a 3.8 percent rate in the fourth quarter. That was the quickest pace since the fourth quarter of 2014 and followed a 2.2 percent rate of growth in the July-September period.
The acceleration in consumer spending stoked inflation. The Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) price index excluding food and energy, rose at an unrevised 1.9 percent rate. The rise was the fastest in more than a year and followed a 1.3 percent pace of increase in the third quarter.
But companies failed to produce enough to meet the burst in consumer spending, resulting in a surge in imports that subtracted from GDP growth.
Imports grew at an upwardly revised 14.0 percent pace instead of the previously reported 13.9 percent rate. That was the quickest pace since the third quarter of 2010 and offset a rise in exports that is being driven by weakness in the dollar.
The resulting trade deficit sliced off 1.13 percentage points from GDP growth last quarter, the most in a year, after adding 0.36 percentage point in the third quarter.
Robust consumer spending also curbed the accumulation of inventories. Inventories increased at a rate of $8.0 billion, instead of the previously reported $9.2 billion pace. As a result, inventories subtracted 0.70 percentage point from GDP growth after adding 0.79 percentage point in the prior period.
Growth in business spending on equipment was revised up to an 11.8 percent rate from the 11.4 percent pace published last month. That was the best performance since the third quarter of 2014.
The momentum, however, appears to be slowing, with a report on Tuesday showing a second straight monthly decline in core capital goods orders in January.
Investment in homebuilding increased at a 13.0 percent rate, rather than the previously reported 11.6 percent pace, after contracting for two straight quarters. Government spending grew at a 2.9 percent rate, revised down from a 3.0 percent pace. That was the strongest pace since the second quarter of 2015.
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