The U.S. economy probably ended last year with the longest stretch of 3 percent-or-better growth since 2005. The $17 trillion question is, can it keep up this performance this late in the business cycle?
Solid consumer spending, accelerating business investment and a housing rebound combined to drive fourth-quarter demand in the world’s largest economy. Gross domestic product expanded at a 3 percent annualized rate after 3.2 percent in the third quarter and 3.1 percent in the previous period, according to the Bloomberg survey median ahead of Commerce Department data due Friday.
Tax cuts championed by President Donald Trump have fueled expectations of an extended boom in capital spending and buoyed household confidence. Maintaining economic growth of at least 3 percent, a goal of the president’s, is a bigger challenge. One reason is household consumption -- which accounts for about 70 percent of GDP -- may struggle to pick up amid tepid wage gains, rising debt and gradually increasing borrowing costs as the Federal Reserve tightens monetary policy.
“The economy entered this year with solid momentum,” said Ryan Sweet, an economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. “Consumers did their part. Business investment picked up. We’re coming off of a very strong second half, which will be difficult to duplicate,” as “there’s going to be a bit of a spending hangover.”
The outlook for the world’s largest economy has been central to discussions at this week’s meeting of the World Economic Forum in Davos, Switzerland, with most executives sounding upbeat. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon told Bloomberg Television on Wednesday that “I’m quite optimistic about the immediate future” and that he didn’t “see the potholes that are going to reverse it.”
Consumption climbed an annualized 3.7 percent last quarter, the fastest since April-June 2016, the Bloomberg survey median shows. Business spending on equipment may have increased more than 10 percent on the heels of a 10.8 percent advance, the best two quarters since 2014, according to forecasts from Sweet and Barclays Plc.
It’s unclear how growth was impacted by hurricanes that disrupted activity in the third quarter and sparked rebuilding by the government and private sector. The replacement of damaged vehicles and houses probably boosted demand a bit in late 2017, Sweet said. Carl Riccadonna, chief U.S. economist at Bloomberg Economics, reckons the storms’ contribution was partially reversed last quarter.
Going forward, there may be other ups and downs. The Trump administration has reduced regulatory burdens on businesses and, with the Republican-controlled Congress, slashed the corporate tax rate to 21 percent from 35 percent. Apple Inc., Wal-Mart Stores Inc. and JPMorgan Chase & Co. are among those planning to raise investment, hiring or wages.
For consumers, the tailwinds range from lower taxes to healthier finances and the lowest unemployment rate since 2000. At the same time, there may be less room for discretionary purchases, given rising gasoline costs, high rents and modest wage gains. Household debt is at a record high while the saving rate is the lowest in a decade.
Sustained 3 percent growth is “not yet a reality,” according to Bloomberg Economics’ Riccadonna and Yelena Shulyatyeva. Third-quarter growth was inflated by hurricane distortions including an inventory build and lower imports, and the April-June period reflected payback from an inordinately weak first quarter.
“While output growth is accelerating, progress is less advanced than the back-to-back GDP results exceeding 3 percent in the second and third quarter would otherwise suggest,” they wrote Jan. 19.
James Knightley, ING Bank NV’s chief international economist, is more upbeat. He says improving markets in Europe and Asia also bode well for U.S. growth around 3 percent.
“This fantastic run can continue through 2018 given the great shape the economy is currently in,” Knightley wrote in a Jan. 23 research note. “Domestic demand is powering ahead with housing numbers, retail sales, the state of the jobs market and business surveys all suggesting that momentum is very strong.”
By mid-2018, the expansion would become the second-longest in history, trailing the 10-year period of the 1990s. Nonetheless, dismal productivity and slow labor-force expansion indicate “the economy is not going to be able to grow consistently above or close to 3 percent for the foreseeable future,” according to Sweet from Moody’s.
That means modest-to-moderate growth -- the Fed’s latest Beige Book description -- may well outlast the Trump administration.
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