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Economic growth in the final quarter of 2019 came in at 2.1% as expected, with the relatively weak result showing the impact of the trade war between the US and China. Annually, the economy grew at 2.3%, lower than figures seen in 2018 and 2017.

Key Takeaways

• Q4 GDP grew 2.1% as expected. Annual figures of 2.3% were lower than 2.9% in 2018 and 2.4% the year prior.
• Strong consumer spending helped offset downward momentum from a number of other areas dragging on GDP.
• The 3-year low in GDP comes amid a slowing global economy and a major drag on US business investment.

Following the 2017 tax cuts implemented by the Trump administration, the government predicted 2019 GDP of at least 3%. However, trade protectionism has impacted many industries, including manufacturing, which accounts for 11% of the US economy. Business investment contracted throughout last year as a result of uncertainty around the 18-month trade war.

Strong consumer spending helped boost the economy in the face of these headwinds, although the Q4 pace of growth came in at 1.8% vs. 3.2% in Q34. Consumer spending accounts for 68% of the US economy and added 1.2% to the quarterly rise at the end of 2019. Real disposable income growth slowed last quarter from 2.9% to 1.5%, or 3% annually vs. 4% in 2018. The savings rate saw little change at 7.7%.

GDP rose 2.3% yr/yr in 2019. Clear downshift as 2018 fiscal bump faded. Also, biz inv negative for *past 3 quarters*; haven't seen that since the last recession. Put those facts together and it's clear that econ impact of tax cut was all Keynes, no Laffer. pic.twitter.com/sgQyqEdpJX

— Jared Bernstein (@econjared) January 30, 2020

Durable goods orders rose 1.2%, and nondurables grew 0.8%, the slowest pace since Q1 2018. Net exports also contributed to growth, rising 1.4% despite the ongoing trade war. Imports saw a major fall of 8.7. Private domestic investment fell 6.1% in Q1, the third consecutive decline, while investment fell 10.1% in structures and dropped 2.9% in equipment. Meanwhile, intellectual property product investment rose 5.9%. Government spending rose, with defence spending leading at 4.9% growth.

US President Donald Trump recently called for the Federal Reserve to implement crisis-style monetary policies and cut interest rates to zero to stimulate economic growth. The FOMC met on Wednesday, opting to keep interest rates to change. The market predicts that rates will fall again before the end of the year.

Market Reaction

Gold prices have risen since the release of the report. Spot gold last traded at $1,578.06/oz, up 0.53% with a high of $1,582.79/oz and a low of $1,570.13/oz. Prices are likely rising on the ongoing coverage of the Chinese coronavirus. 170 people are reported to have died from the illness with 7,700 infected in China. The disease has spread to Europe and North America, although appears to be contained. There are concerns that, among other things, the crisis may affect the recently-signed trade agreement between the US and China.