US Economy Grew 2.9% in 2018, but What Will 2019 Bring?

The US economy kicked into high gear last year in the wake of sweeping tax cuts but slowed in the final months, suggesting the boom had begun to fade, according to government data released Thursday.

Cooling in the fourth quarter also pointed to significantly slower growth this year, as many economists now forecast, even though the White House continues to predict robust growth to continue unabated.

GDP expanded by 2.9 percent in 2018 compared to 2017, according to a Commerce Department report, up from 2.2 percent the prior year and approaching the target set by President Donald Trump. Last year’s pace matched growth in 2015, which was the highest since 2005.

With businesses facing a sudden windfall in tax cuts amid increased government spending, growth zoomed higher as companies built factories and stockpiled inventories, according to the Commerce Department report that was delayed by a month due to a shutdown of the federal government. In 2018, defense spending grew 3.4 percent, the biggest increase in nine years. But in the October-December period, growth tapered down to an annual rate of 2.6 percent, a sharp drop from 3.4 percent in the third quarter, and 4.2 percent in the second. Still even the slower fourth-quarter expansion was better than expected, as economists had predicted lackluster consumer spending over the holiday period would take a deeper cut.

The robust full-year growth could simultaneously lend support to Trump and to his critics, showing unmistakable economic gains last year, amid brisk job creation, but indicating it may have been a temporary boost purchased with skyrocketing government deficits. “In short, this is not a bad performance,” Ian Shepherdson of Pantheon Macroeconomics wrote in a note to clients. “Growth had to slow as the boost from tax cuts faded, though the transition was eased by the plunge in gas prices.”

BREAKING! The US economy grew 2.6% (annualized) in Q1, more than expected, YoY #GDP growth 3.1%. pic.twitter.com/JhudI6cRzX

— jeroen blokland (@jsblokland) February 28, 2019

The first quarter of 2019, however, faces “real headwinds,” he noted, such as recovering fuel prices, a five-week government shutdown and sluggish business investment in machinery and equipment. The non-partisan Congressional Budget Office predicted last month the US economy would see respectable but markedly slower growth of 2.3 percent this year as the 2017 tax cuts and 2018 fiscal stimulus wear off.

But top White House economist Larry Kudlow said 2019 was off to a great start, citing strong job creation in January, a recovery in consumer confidence and a likely trade deal with China that he said would probably give the economy a bump. “The policies are working,” Kudlow told CNBC shortly after the data was released.  “I’m very optimistic,” he said, noting “lower tax rates, deregulation, trade reform, energy reform, it’s working.”

Wall Street was largely unmoved by the numbers, with stock prices slightly lower in mid-morning trading in wake of negative data on China’s manufacturing sector, which contracted for the third month in a row. Trump’s trade war also took a nasty bite out of US growth in the third quarter as Washington and Beijing exchanged punishing tariffs on more than $360 billion in two-way trade, a dispute both sides say they are now close to resolving.Falling international trade subtracted two percent from the overall economy in the third quarter.

And in the final three months of the year, areas that had seen a post-stimulus boost appeared to be slowing: businesses investment in factory building slowed to its lowest level in a year, and non-defense government spending contracted by 5.6 percent, its biggest decrease in five years. The weak housing sector, which has seen falling sales and slowing construction, also shrank 3.5 percent, its third quarterly contraction in a row.

The five-week government shutdown, most of which fell in January, likely had little impact on the GDP data, as the work stoppage mostly fell in January, and will not show up until the first quarter. Officials estimate it took a meagre 0.02 percent slice out of economic output but could have had larger effects indirectly.