U.S. Gross Domestic Product

U.S. Economy Steady But Slowing

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Consumer spending in the U.S. slowed in the fourth quarter as holiday sales at major retailers such as Target were lower than expected.

Weak consumer spending and a huge decline in business investment held back the world's largest economy in the fourth quarter of 2019.

The U.S. economy expanded at a moderate 2.1% in the fourth quarter of 2019 as ever-narrowing increases in consumer spending, a surge in government spending and a massive decline in imports helped to offset further deterioration in domestic investment -- a potentially ominious development that could pose a challenge for growth in 2020.

Gross domestic product (GDP), the total value of all goods and services produced, grew at an inflation-adjusted annual rate of 2.1% in the fourth quarter of 2019, according to the advance estimate released Thursday by the Commerce Department.  Annual GDP for 2019 rose 2.3%, according to the same release, compared with 2.9% the previous year.  Both numbers are expected to be revised in the coming months.

Consumer spending, which represents approximately 70% of the economy, slowed significantly in the fourth quarter increasing only slightly at 1.8% (see above chart), a 44% decrease from the 3.2% figure in the previous quarter and a 61% decline from the 4.6% increase registered back in the second quarter. 

The slide in consumer spending was caused by dramatic slowdowns in both durable and nondurable goods, particuarly automobiles, and dissapointing holiday sales results from large national retailers such as Target.  "We faced challenges throughout November and December in key seasonal merchandise categories and our holiday sales did not meet our expectations," said Target CEO Brian Cornell in a statement to investors on January 15th.

Durable goods increased 2.1% in the fourth quarter but that was a huge decline from the 8.1% and 13.0% increases in the third and second quarters respectively.

Meanwhile, gross private domestic investment, which includes both business and residential investment, fell 6.1% almost matching the 6.3% decline in the second quarter (see accompanying chart).  It was the third straight quarter that the all-important supply-side, or growth side, of the economy has declined putting more pressure on consumer spending and exports.

The decline in domestic investment was led by a 10.1% plunge in nonresidential structures, which represents business investments in property and facilities, also referred to as capital expenditures.  Business investment contracted sharply in 2019 after rising briefly in the early part of 2018 largely as the result of the tax legislation passed in December 2017 that lowered the corprate tax rate from 35% to 21%.

The decline in durable goods was not a surprise since overall car sales fell in 2019 with Ford, General Motors and Toyota all reporting sales decreases for the year.  Ford's vehicle sales fell 3.2% for the year and 1.3% for the quarter, as reported in the Wall Street Journal on January 7th.  GM's sales fell 2.3% in 2019 while Toyota's fell 1.8%.

Fourth quarter GDP growth would have been worse if not for a sudden 8.7% drop in imports that contributed 1.32 percentage points to the 2.1% growth figure.  Imports are a subtraction in the calculation of GDP so a decrease in imports results in a positive contribution to net exports.

Nominal or current-dollar GDP, the amount not adjusted for inflation, increased $191.7 billion in the fourth quarter and now stands at $21.73 trillion, by far the largest in the world.