Fourth-quarter economic malaise may very well carry over into 2017
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Friday’s minimal upward revision to fourth-quarter U.S. gross domestic product (GDP) from 1.9 percent to 2.1 percent, while welcomed improvement, simply perpetuates the longstanding storyline for 2016: After a disappointing first half of the year with minimal 1-percent growth, the economy accelerated from July to September.  

The better-than-expected growth profile throughout the fall, however, was unsustainable, with topline activity once again slowing noticeably by the fourth quarter, falling back down in line with the trend pace established in the aftermath of the Great Recession.

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Far from robust, the U.S. economy has maintained positive but lackluster growth in 2016 and over the longer term throughout the recovery.

  

In the details of the final Q4 GDP report, personal consumption was revised up from 3.0 percent to 3.5 percent, thanks to modestly stronger spending on goods and services. On par with third-quarter spending, goods consumption was revised up from 5.7 percent to 6.0 percent in Friday's report, and service spending was revised higher from 1.8 percent to 2.4 percent.  

With nearly two years of reduced energy prices and ample additional cash in their wallets as a result, households remain cautious in their spending patterns. In traditional discretionary goods and services, the average household has pared back spending to some degree amid moderate labor market conditions and wage growth, as well as rising costs and expenditures elsewhere, particularly in healthcare. 

Gross private investment was also revised slightly higher from 9.2 percent to 9.4 percent in the third and final Q4 GDP report, reflecting a stronger inventory rebuild than originally reported in the second-round report. Inventories rose $49.6 billion in Q4, revised up from a $46.2 billion gain, and following a $7.1 billion rise in Q3.

Inventories contributed a full percentage point to topline GDP at the end of 2016. Excluding inventories, Q4 GDP rose just 1.1 percent. While an important component to topline growth, stockpiling goods will only serve as a temporary support without a meaningful rise in orders to absorb the existing production. 

At this point, however, businesses remain hesitant to invest in equipment, structures, and high-wage, full-time employees. Contrary to consumption, fixed investment was revised down from 3.2 percent to 2.9 percent in the latest report due to still-modest equipment spending and a downward revision to investment in intellectual property.  

Equipment spending was unrevised at 1.9 percent, a two-quarter low, and intellectual property was revised down from 4.5 percent to 1.3 percent, a seven-quarter low.

Residential investment was unrevised in the latest GDP report at 9.6 percent. Still a positive contributor to headline GDP, the housing market faces increased pressure amid even a moderately rising interest rate environment, particularly as younger Americans  face a lingering inability to finance a home purchase with minimal savings and ample student loan debt and, in many cases, prefer the mobility of renting over home ownership. 

Trade was little changed in the final Q4 GDP report, with exports slightly more negative (-4.5 percent) and imports slightly more positive (9.0 percent) than originally reported in the previous release.

Finally, government spending was revised down from 0.4 percent to 0.2 percent. The majority of the revision was at the state and local level, where spending was revised down from 1.3 percent to 1.0 percent at the end of 2016. Facing uncertain growth and reduced revenue streams, many local governments are continuing to reduce spending and bolster their balance sheets.  

Again, the overall conclusion for 2016 growth remains unchanged — after a lackluster first half, growth accelerated from July to September only to slow back down in line with trend growth in the final months of the year.  

More importantly, however, at this point, the slowdown in activity is expected to continue with Q1 GDP poised to be just 1 percent, according to the latest release of the GDPNow model from the Atlanta Federal Reserve.  

The U.S. recovery may remain in positive territory, but the outlook for just how positive continues to face grave barriers and hardship.  Without a meaningful pickup in business investment and job creation, the U.S. economy is poised to lose further momentum in the coming quarters.  

For the Fed, a moderate rise in inflation at the start of the year was more than enough justification for a March rate hike. However, going forward, a continued lackluster growth profile will make it increasingly difficult to suggest additional rate hikes are warranted, particularly if energy prices stabilize in the coming months, removing the upward support to headline price measures. 

 

Lindsey Piegza, Ph.D., is the chief economist for Stifel Fixed Income. Stifel is a full-service wealth management and investment banking firm, established in 1890 and based in St. Louis, Missouri. 


The views expressed by contributors are their own and not the views of The Hill.