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The US GDP came in stronger than expected in Q4, although still significantly weaker than in Q3. Business investment helped bolster the economy at the close of 2018. Q4 GDP came in at 2.6%, 0.4% higher than expected.

Key Takeaways

• The US economy grew 2.6% at an annualized rate in Q3 2018 vs 2.2% expected and 3.4% in Q3 according to the US Commerce Department.
• The overall annual GDP comes in at 3.1%, 0.1% higher than the goal outlined by the Trump administration.
• Tax cuts may have stimulated growth to an extent and the economy is months away from entering the longest ever period of expansion.

While the economy is now on track for the longest-ever period of expansion come summer, uncertainty surrounding the trade war and Brexit may yet put a damper on growth. US trade rep Robert Lighthizer stated yesterday that there is much work to be done to finalize a deal with China, and that a deal ultimately may not come to pass at all, which would perhaps leave the two largest economies in the world embroiled in the ongoing feud indefinitely.

The report indicates that tax cuts may have played a hand in the growth which surpassed market expectations for Q4, as did the strong labor market. Changes in Fed monetary policy regarding reduced rate hikes may also play a role in continued growth.

US 2-year Treasury #yield rises as better than expected #GDP growth could mean the #Fed ends up behind the curve. Given current #inflation developments however we're not close to that point now. pic.twitter.com/otLgcEgBrP

— jeroen blokland (@jsblokland) February 28, 2019

Economic Spending

Defense spending rose 0.4% to 6.9%, a 9-year high, while there was a 5.9% contraction in non-defense government spending, which is the biggest drop since 2013.

Non-residential business investment rose 6.2% on equipment, software, and research spending in Q4, helping to boost the quarterly figures. Consumption, which accounts for the bulk of economic activity, was lower than expected at 2.8% growth. Consumer spending nevertheless contributed 1.92% to the overall growth of the Q4 GDP, with health care, financial services, insurance, and other non-durable goods and services leading the way while accommodation and food spending fell.

The consumer spending data does not seem to be in line with the US government report indicating that retail spending hit a 9-year low in December, and several major retailers have expressed doubt surrounding that report, stating that consumers continued to do business with them in December.

Savings rose from 6.4% to 6.7%, and inflation-adjusted disposable income rose 4.2%, the highest in three quarters. Spending on structures hit a yearly low with a 4.2% drop, while intellectual property spending jumped 13.1%.

Housing continued to show weak activity with contractions in all four quarters and a 3.5% drop in Q4. Home sales dropped due to high mortgage rates as well as home prices outpacing wage growth. Exports overall brought the Q3 GDP figure down 0.22% due to tariffs impacting business as a result of the trade war.

Government Shutdown Effect

The partial shutdown of the US government for 35 days beginning in late December lowered Q4 GDP by around 0.1% due to the disruption of federal government services, and likely will have a greater impact on Q1 2019 – the Commerce Department has pointed out that it is too soon to accurately analyze the full effects of the shutdown on the US economy.

The shutdown delayed the release of the first GDP estimate which was due on January 30 – today’s report accounts for the initial and subsequent estimate, likely making it more accurate than traditional first GDP estimates.

Growth Still Above Average

Despite being slower than in the previous two quarters, the US economy still grew at a pace above the average rate of growth during this period of economic expansion in Q4. While the world is entering a period of increasing economic uncertainty with chances of a global recession becoming higher, the US economy is for the time being in good health and performing well overall, exceeding President Trump’s 2018 growth targets.

Inflation is still muted, giving the Fed the space required to follow through with their indicated approach of easing off on rate hikes for 2019. Excluding the volatile components of food and energy, the Fed’s preferred price index rose 1.7% vs 2% target range.

Expert Outlook

Neil Dutta, head of economics at Renaissance Macro Research LLC, stated that the strength in overall private domestic demand is “good enough to keep the momentum in the economy going,” citing research and development as a positive aspect of the report.

Market Reaction

After a strong rally earlier in the day, gold prices shot downward, perhaps a direct response to the Q4 GDP report which was released just before the price correction. The US dollar rose following the report, as did treasuries, creating selling pressure on the price of spot gold.

Gold is now trading up 0.03% at $1,318.10/oz with a high of $1,326.96/oz, with a strong dollar pushing gold closer to support at $1,315.00/oz.