Economic growth slowed more than expected due to a plunge in soybeans shipments
The US economy clocked a seasonally adjusted annual growth rate of 1.9% in Q4 FY16, versus forecasts for a 2.2% growth rate, according to advance estimates released by the Bureau of Economic Analysis (BEA) on Friday, January 27th, 2017. In Q3 FY16, real GDP grew a modest 3.5%, up from 1.4% in Q2 FY16, marking the highest growth rate in two years. US economic growth slowed more than expected in Q4 FY16 as a plunge in soybeans shipments weighed on exports. However, steady consumer spending and rising business investment suggests that the economy would continue to expand in the coming year. The second estimate for Q4 FY16, based on more complete data, will be released on February 28th, 2017.
The latest data brings to light the headwinds to stronger growth facing the Trump administration, which has announced a goal of 3% to 4% growth fueled by a mix of tax cuts, fiscal spending, and deregulation. Trump has pledged as much as $1 trillion in infrastructure investment and defense spending as well as cuts to corporate and individual income taxes, aimed at spurring economic activity and inflation. However, any dismantling of foreign trade agreements or imposition of import tariffs would be expected to hurt the US economy. US tech firms, most of which make their products overseas, could bear the brunt of any new trade restrictions.
Q4 FY16 growth boosted by rebound in business investment
BEA data shows that Q4 FY16 growth was fuelled by solid consumer spending, a pickup in business investment, a rebound for home construction, and stronger spending by state and local governments. Household spending, which accounts for the majority of total activity, rose at a healthy 2.5% annual rate in the final three months of the year, led by robust spending on durable goods like motor vehicles. Another volatile category, private inventories, added a full percentage point to Q4 FY16 growth.
Fixed non-resident investment rose for the third consecutive quarter, lifted by rising spending on equipment and R&D projects. Energy companies had earlier scaled back spending on new wells and equipment as oil prices plunged starting in 2014, but investment has started to rebound as prices have stabilized in recent months. Another bright spot was the housing sector. Residential investment grew at a 10.2% annual rate in Q4 FY16 after two straight quarters of decline.
Exports drags down Q4 FY16 growth
Net exports subtracted 1.7% from Q4 FY16 GDP growth rate, reflecting a drop in exports and a large rise in imports. In Q4 FY16, exports fell at a 4.3% rate, reversing the 10% increase notched in Q3 FY16. The Q4 FY16 drop in exports was the biggest since the first quarter of 2015. Most of the fall came from lower soybean exports, which has propped up GDP growth in Q3 FY16 after a poor soy harvest in Argentina and Brazil.
The current-dollar GDP increased 4%, or $185.5 billion, in Q4 FY16 to a level of $18,860.8 billion. In Q3 FY16, current dollar GDP increased 5%, or $225.2 billion, as per BEA data. The price index for gross domestic purchases increased 2% in Q4 FY16 compared to an increase of 1.5% in Q3 FY16. The PCE price index increased 2.2% versus an increase of 1.5%. Excluding food and energy prices, the PCE price index increased 1.3% compared to an increase of 1.7%.
Real GDP grew a mere 1.6% in 2016 versus a modest increase of 2.6% in 2015, the weakest pace since 2011. Growth in H1 FY16 was curbed by cheap oil and a strong dollar, which undercut company profits and weighed on business investment. The increase in real GDP in 2016 reflected positive contributions from residential fixed investment, state and local government spending, exports, and federal government spending, partly offset by negative contributions from private inventory investment and non-residential fixed investment.
The deceleration in real GDP from 2015 to 2016 reflected a downturn in private inventory investment, a fall in nonresidential fixed investment, and lower residential fixed investment and in state and local government spending, offset by lower imports and higher federal government spending.
As a result, the current-dollar GDP increased 2.9%, or $530.3 billion, in 2016 to $18,566.9 billion compared to an increase of 3.7%, or $643.5 billion, in 2015. The price index for gross domestic purchases increased 1.0% in 2016 versus an increase of 0.4% in 2015. The price index for gross domestic purchases increased 1.5% during 2016 versus an increase of 0.4% in 2015.
Meanwhile, Fed officials have reiterated that near-term risks to their outlook are roughly balanced, while projecting three quarter-point rate increases in 2018, based on median federal fund forecasts of 1.375% in 2017 and 2.125% in 2018. Encouragingly, policy makers see GDP growing 2.1% in 2017, up from a previous forecast of 2%, while slightly reducing their outlook for unemployment to 4.5%.
The Federal Open Market Committee (FOMC), which met in Washington on December 13th-14th, 2016, increased its benchmark rate by a quarter percentage point to a range of 0.50% to 0.75% for the first time in 2016. The Fed has also indicated that it expects to hike rates three more times in 2017, two or three in 2018, and three in 2019, as inflation expectations have increased considerably along with the strengthening of labor market conditions. The focus now shifts to the Fed’s meeting on January 31st and February 01st, 2016, in Washington, and on March 14th-15th, 2016 to assess the economic scenario post the rate hike.