US: Solid increase in GDP - NAB

US GDP grew solidly for the third consecutive quarter to end 2017 and the composition of GDP growth was also positive with consumption strong and business investment accelerating, explains, Tony Kelly, Senior Economist at NAB.

Key Quotes

“US GDP grew solidly for the third consecutive quarter to end 2017. GDP growth in the December quarter was 0.6% qoq, or 2.6% on an annualised basis. Despite a slow start, growth over the year (December 2017 on December 2016) was 2.5% yoy, the fastest annual pace since mid-2015.”

“The composition of GDP growth was also positive. Consumption growth was strong, business investment growth strengthened, while residential investment turned positive. The major drags came from net exports and also inventories, with the latter basically reversing the previous quarter’s gains. Inventories are not high relative to sales so a return to more normal levels of inventory accumulation is a possible upside for the March quarter 2018.”

“Assessment

• While GDP growth in the December quarter was only a bit stronger than we had expected, the composition of growth was better, with the slowdown in inventory accumulation, and what looks like exaggerated weakness in net exports, unlikely to persist.
• As a result we have lifted our forecast for 2018 GDP growth from 2.4% to 2.7%. A risk around this is the recent tendency for the March quarter growth rate to be relatively weak, although if due to seasonal adjustment issues it would imply higher growth over the rest of the year.
• Growth of 2.7% for 2018 is above our assessment of the economy’s longer term potential growth rate. The expectation for above trend growth reflects the current momentum in the economy as well as the fiscal stimulus from the recently enacted tax cuts which kicked in at the start of 2018. 
• The continuing fall in the savings rate raises concerns over the sustainability of the recent strong growth in consumption. While we expect growth to moderate from its December quarter pace we don’t anticipate a major correction. The fall in the savings rate in part probably reflects the gains in household wealth and the stock market has accelerated into 2018. Moreover, personal income tax cuts will improve household finances, although recent increases in oil prices work the other way.
• The increases in oil prices, however, will support business investment. Businesses were also beneficiaries of the tax cuts, which may provide some additional spur to investment. 
• Above trend growth should lead to further declines in the unemployment rate. The Fed will continue to tighten policy in this environment– subject to inflation showing signs of moving back to the 2% target growth rate. While annual headline and core inflation remains below the Fed’s 2% target, the upturn at the end of the year lends some support to the Fed’s assessment that the soft inflation readings seen earlier in 2017 will be temporary and that inflation will gradually move towards its target level.
• Into 2019, as monetary policy becomes less benign, the impact of this year’s fiscal stimulus fades and as capacity constraints start to bite, we expect GDP growth to moderate to 2.0%.”