US economy shifts into low gear as fiscal boost wanes

The US economy slowed more than initially thought in the fourth quarter, keeping growth in 2018 below the Trump administration's 3 per cent target, and corporate profits fell by the most in a year after a one-off boost from lower taxes.

The economy is losing momentum as stimulus from the White House's $1.5 trillion in tax cuts and a government spending blitz diminishes. It is also facing headwinds from slowing global growth, Washington's trade war with China and uncertainty over Britain's departure from the European Union.

The darkening clouds over the economy contributed to the Federal Reserve's decision last week to bring its three-year campaign to tighten monetary policy to an abrupt end. The US central bank abandoned projections for any interest rate hikes this year after increasing borrowing costs four times in 2018.

“The trend in quarterly growth is clearly on the wane,” said Curt Long, Chief Economist at the National Association of Federally-Insured Credit Unions. “The strength of the labour market should be enough to postpone a recession for at least this year, but the margins are getting smaller, and it would not take much to tilt growth into negative territory.”

Slower growth

Gross domestic product increased at a 2.2 per cent annualised rate, the Commerce Department said in its third reading of fourth-quarter GDP growth on Thursday. That was down from the 2.6 per cent pace estimated in February.

The economy expanded at a 3.4 per cent pace in the third quarter. For all of 2018, the economy grew 2.9 per cent as previously reported. Annual growth still missed the White House's 3 per cent target despite the massive fiscal stimulus.

Growth last year was, however, the strongest since 2015 and was an acceleration from the 2.2 per cent logged in 2017.

Compared to the fourth quarter of 2017, GDP rose 3.0 per cent, revised down from the 3.1 per cent reported last month. President Donald Trump has pointed to the year-on-year growth figure as proof that the tax cuts, which have contributed to a swelling of the federal government deficit, have put the economy on a sustainable path of strong growth.

The Commerce Department's GDP release, however, highlighted the 2.9 per cent as the annual growth for 2018. Trump likes to showcase the economy as one of the biggest achievements of his term, declaring last July that his administration had “accomplished an economic turnaround of historic proportions”.

On the campaign trail, Trump boasted he could boost annual GDP growth to 4 per cent, a goal analysts said was always unrealistic given low productivity, among other factors. “Three per cent growth is not that much different than 2.7 per cent in President (Barack) Obama's term so you can't brag too much,” said Chris Rupkey, chief economist at MUFG in New York.

Weak profits

Economists polled by Reuters had forecast GDP in the fourth quarter being revised down to a 2.4 per cent pace. The revisions to the fourth-quarter reading reflected markdowns to consumer and business spending, as well as government outlays and investment in home building. Exports were, however, revised up.

Growth appears to have slowed even further early in the first quarter, with retail sales rising modestly, manufacturing production falling and home building tepid. The softening economic outlook is seen helping to undercut profit growth, which weakened in late 2018.

After tax profits without inventory valuation and capital consumption adjustment, which correspond to S&P 500 profits, fell at a 1.7 per cent rate or $34.2 billion in the fourth quarter. That was the weakest pace since the fourth quarter of 2017 and followed a 0.9 per cent rise in the third quarter.

When measured from the income side, the economy grew at a 1.7 per cent rate in the fourth quarter and 2.4 per cent in 2018.

“The deceleration in GDP growth this year will weigh on corporate profit growth, while increased labor costs pose a threat to margins,” said Jay Bryson, global economist at Wells Fargo Securities in Charlotte, North Carolina.

Growth forecasts for the first quarter are as low as a 0.9 per cent rate. US financial markets were little moved as investors weighed the weaker growth figures against some positive signs on US-China trade talks.

Strong labour market

Growth in consumer spending, which accounts for more than two-thirds of US economic activity, increased at a 2.5 per cent rate in the fourth quarter instead of the previously reported 2.8 per cent pace.

Consumer spending remains underpinned by a strong labour market, with a report from the Labour Department showing the number of Americans filing for unemployment benefits fell to a more than one-month low last week.

Growth in business spending on equipment and intellectual products was lowered. The drop in residential construction outlays was deeper than previously reported and government spending actually contracted instead of expanding.