The U.S. economy grew at a solid rate of 2.6 percent in the final three months of last year, helped by the fastest consumer spending since the spring of 2016 and a big rebound in home construction.
The fourth quarter advance in the gross domestic product, the country’s total output of goods and services, followed gains of just above 3 percent in the second and third quarters, the Commerce Department reported Friday. The slowdown in the October-December period reflected a worsening trade deficit and less growth in inventory restocking by companies.
For all of 2017, the economy grew 2.3 percent. That is a significant improvement from a 1.5 percent gain in 2016 but little changed from the modest 2.2 percent average growth rate turned in since the Great Recession ended in June 2009.
Economists are looking for even better growth this year, propelled by the $1.5 trillion tax cut that President Donald Trump pushed through Congress in December. The Trump administration contends that its economic program of tax cuts, deregulation and tougher enforcement of trade laws will lift economic growth to sustained rates of 3 percent or better in coming years.
Trump has said his tax plan will serve as “rocket fuel” for the economy by prompting Americans to spend more and businesses to step up investment.
Economists, however, believe the growth spurt will be short-lived.
“Deficit-financed tax cuts will provide some near-term juice to the economy but it will prove to be temporary because we are already at full employment and the Federal Reserve will respond by raising interest rates more aggressively,” said Mark Zandi, chief economist at Moody’s Analytics.
Michael Pearce, senior U.S. economist at Capital Economics, said that the imports surge that widened the trade deficit reflected a pay-back from port disruptions caused by hurricanes in the third quarter. He forecast solid growth in coming quarters.
“The U.S. economy had plenty of momentum even before the tax cuts take effect this year,” Pearce said.
Treasury Secretary Steven Mnuchin, interviewed on CNBC, described the modest slowdown in the fourth quarter as a short-term aberration.
“We’re not concerned about any one quarter which could be revised up or down,” he said. “I think people now expect we’re getting to 3 percent GDP.”
Mnuchin said the administration was very happy with the initial reaction from U.S. companies to the new tax bill, which he said had already generated pay bonuses for more than 2.5 million Americans, amounting to “literally hundreds of billions of dollars of commitments.”
The president, speaking Friday to the World Economic Forum in Davos, Switzerland, also touted the benefits of the tax overhaul, saying, “America is open for business and we are competitive once again.”
Trump said that because of the tax plan, which had reduced individual and corporate tax rates, Apple had announced it planned to bring $245 billion in overseas profits back to America.
Zandi said he believed the tax cuts would add as much as 0.4 percentage points to growth this year, pushing total GDP to 2.9 percent. He said growth would fall back to 2.2 percent in 2019 as the impact of the tax cuts fades, then slow further to a tiny 1 percent gain in 2020 as rising interest rates from the higher budget deficits and Fed rate hikes begin to drag growth.
Friday’s GDP report showed that the fourth quarter growth was spurred by a 3.8 percent surge in spending by consumers, who account for 70 percent of economic activity. That was up from a 2.2 percent rise in the third quarter and was the fastest quarterly advance since the spring of 2016.
Business investment in new plants and equipment was also strong, rising at a 6.8 percent rate in the fourth quarter. Spending on home construction surged at a rate of 11.6 percent after two quarters of declines.
The areas of strength were offset somewhat by a big increase in the country’s trade deficit, which subtracted 1.1 percentage points from growth, and a slowdown in business spending to restock their inventories, which trimmed growth by 0.7 percentage point.