The US economy is well into its 11th year of economic expansion, the longest on record, but is falling short of Trump’s plan to boost growth above 3% with the $1.5tn tax cut package. Data released on Thursday showed the US economy grew at an annualised rate of 2.1% in Q4’19. For 2019 as a whole, the economy grew at 2.3%, which is the slowest rate since 2016, but falls in line with the average growth rate since 2009 which has been just over 2%.
Importantly, the consumer showed some signs of slowing; consumer spending grew at 1.8% annualised rate in Q4 which was down from 3.2% in Q3. Residential investment was robust but business investment was weak, contracting for the third quarter in a row; non-residential fixed investment fell 1.5%. Trade and inventories did impact the Q4 number; private sector inventories detracted 1.1% from growth, reflecting in particular motor dealers due to the General Motors strike in October. However, net exports added 1.48% to GDP and imports fell 8.7% as trade tensions impacted.
The data is consistent with FOMC Chair Jerome Powell’s guidance that the economy is expected to grow moderately this year and that the consumer showed signs of moderation into the end of the year. The key wording change in the FOMC’s January statement was to describe household spending as “rising at a moderate pace”, a downgrade from “strong” in December. While Powell commented that the uncertainties around trade have diminished, he acknowledged that “uncertainties about the outlook remain, including those posed by the new coronavirus”. During the press conference, Powell noted that “when China’s economy slows down, we do feel that. Not as much as countries though that are near China or the trade more actively with China, like some of the Western European countries. We still have, you know, 85 percent of our economy is domestic. And we have a much smaller external sector, trade sector, than other economies just because of our physical location.”
Over the course of January, the Fed futures market has priced in an increasing chance of a rate cut later this year, helped by the downside risks to global growth from the coronavirus. We expect the US growth outlook to remain subdued and patchy in 2020 and that the Fed may well have to cut interest rates again.