WASHINGTON (Reuters) – The U.S. economy slowed more than initially thought in the fourth quarter, keeping growth in 2018 below the Trump administration’s 3 percent annual target, and corporate profits fell by the most in a year.
FILE PHOTO: Shipping containers are pictured stacked on a ship docked at Yusen Terminals (YTI) on Terminal Island at the Port of Los Angeles in Los Angeles, California, U.S., January 30, 2019. REUTERS/Mike Blake/File Photo
Gross domestic product increased at a 2.2 percent annualized rate, the Commerce Department said in its third reading of fourth-quarter GDP growth on Thursday. That was down from the 2.6 percent pace estimated in February.
The economy grew at a 3.4 percent pace in the third quarter. The expansion will be the longest on record in July.
The revisions to the fourth-quarter GDP reading reflected markdowns to consumer and business spending, as well as government outlays and investment in homebuilding.
For all of 2018, the economy grew 2.9 percent as previously reported. Annual growth still missed the White House’s 3 percent target despite $1.5 trillion in tax cuts and a government spending blitz. Growth last year was the strongest since 2015 and was an acceleration from the 2.2 percent logged in 2017.
Compared to the fourth quarter of 2017, the economy expanded 3.0 percent, revised down from the 3.1 percent reported last month. President Donald Trump has pointed to the year-on-year growth figure as proof that fiscal stimulus, which has contributed to a swelling of the federal government deficit, has put the economy on a sustainable path of strong growth.
The Commerce Department’s release, however, highlighted the 2.9 percent 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 percent, a goal analysts always said was unrealistic given low productivity, among other factors.
Economists polled by Reuters had forecast GDP in the fourth quarter being revised down to a 2.4 percent.
There are signs the slowdown in growth persisted early in the first quarter, with retail sales rising modestly and manufacturing production and homebuilding tepid.
That was underscored by weak profits in the fourth quarter. After tax profits without inventory valuation and capital consumption adjustment, which correspond to S&P 500 profits fell at a 1.7 percent 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 percent rise in the third quarter.
The economy is facing headwinds from the fading stimulus, slowing global growth, Washington’s trade war with China and uncertainty over Britain’s departure from the European Union.
These contributed to the Federal Reserve’s decision last week to bring its three-year campaign to tighten monetary policy to an abrupt end. The U.S. central bank abandoned projections for any interest rate hikes this year after increasing borrowing costs four times in 2018.
U.S. financial markets were little moved by the GDP data.
CONSUMER SPENDING REVISED DOWN
Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 2.5 percent rate in the fourth quarter instead of the previously reported 2.8 percent pace. Consumer spending remains underpinned by a strong labor market.
A second report from the Labor Department on Thursday showed initial claims for state unemployment benefits dropped 5,000 to a seasonally adjusted 211,000 for the week ended March 23. Economists polled by Reuters had forecast claims rising to 225,000 in the latest week.
While job growth has slowed after last year’s robust gain, it remains more than enough to keep up with growth in the working age population.
Growth in business spending on equipment was revised down to a 6.6 percent pace from a 6.7 percent rate. Investment in intellectual products was lowered to a 10.7 percent rate from the 13.1 percent pace reported in February.
Investment in residential construction was revised to show it contracting at a 4.7 percent rate instead of at a 3.5 percent rate, marking the fourth straight quarterly decline.
Government investment fell at a 0.4 percent rate, instead of growing at a 0.4 percent pace as previously reported.
But exports were revised up to show them rising at a 1.8 percent pace instead of the 1.6 percent rate reported last month. Imports were revised down, leading to a smaller trade deficit that cut one-tenth of a percentage point from fourth-quarter GDP growth.
The trade deficit was previously estimated to have subtracted 0.22 percentage point from output. Inventories increased at a $96.8 billion rate in the fourth quarter instead of the $97.1 billion reported last month.
Inventory investment added one-tenth of a percentage point to GDP growth last quarter as estimated in February.
Reporting by Lucia Mutikani; Editing by Andrea Ricci