London (CEBR, Pablo Shah) – The US economy fell short of expectations in the final quarter of 2019, expanding at an annualised rate of 2.1% – unchanged from the previous quarter. This is according to the advance estimate released by the Bureau of Economic Analysis today. Consumer spending growth slowed for the second consecutive quarter to an annualised rate of 1.8% in Q4, while private sector investment contracted at an annualised rate of 6.1%. The headline growth rate was bolstered by an uptick in government spending alongside a dramatic decline in imports. The import of goods fell particularly sharply in Q4, contracting at an annualised rate of 11.6% – the fastest rate of contraction in more than ten years. This meant that despite the slowdown in consumer expenditures, a greater share of this spending was made on products originating from firms in the US.
There were several concerning elements of today’s release, in particular a third consecutive quarterly decline in private sector investment and a moderation of consumer spending. However, an annualised growth rate of 2.1% is far from disastrous when viewed in the context of the current performance of other major economies. Moreover, softer measures of the US economy at the start of 2020 have so far been relatively upbeat. Consumer confidence – as measured by the Conference Board’s Index – reached a five-month high in January, reflecting a more positive outlook for future employment prospects. Meanwhile, equities enjoyed a strong start to the year on the back of a thawing of tensions between the US and China, although these gains have recently been offset by concerns surrounding the spread of Coronavirus and its potentially disruptive impact on the global economy.
Yesterday evening, the US Federal Reserve’s Open Market Committee voted unanimously to hold the target range for the federal funds rate (the rate banks charge each other to lend federal funds overnight) at 1.5% – 1.75%. There was little in the central bank’s accompanying statements that took markets by surprise, although there was a notable hardening of its resolve to return inflation to its “symmetric 2% objective”. In previous comments, the US Fed had merely expressed an intention to bring inflation near the 2% target, a position some interpreted as an implicit bias towards sub-target inflation. While the Fed appears fairly set in its current position for the time being, the shift in emphasis could open the door to further interest rate cuts down the road if growth moderates and inflationary pressures remain muted. Cebr forecasts that the US economy will slow gradually this year, recording annual GDP growth of 2.1% in 2020 as a whole.