U.S. economy grew faster than expected in Q4

In the fourth-quarter, U.S. gross domestic product grew at an annualized rate of 2.6%, according to the latest data from the Bureau of Economic Analysis.

Thursday’s report beat expectations, with consensus economists polled by Bloomberg looking for growth to slow to 2.2% during the final three months of the year. The domestic economy grew at a pace of 3.4% in the third quarter and 4.2% in the second quarter.

Despite the softening in GDP in the fourth quarter, overall growth in 2018 was solid. Real GDP grew at a pace of 3.1% in 2018, measured from the fourth quarter of 2017 to the final quarter of 2018. This represented a stronger pace of annual growth than the 3% targeted by the Trump administration.

“The deceleration in real GDP growth in the fourth quarter reflected decelerations in private inventory investment, PCE, and federal government spending and a downturn in state and local government spending,” the BEA wrote in a statement. “These movements were partly offset by an upturn in exports and an acceleration in nonresidential fixed investment. Imports increased less in the fourth quarter than in the third quarter.”

Personal consumption grew by 2.8% in the fourth quarter, slower than the 3% expected and the 3.5% pace from the quarter prior. The PCE price index increased 1.5% in the fourth quarter, compared with an advance of 1.6% previously. The core PCE price index excluding food and energy prices rose 1.7%, versus an expected 1.6% uptick.

Non-residential investment, a proxy for business spending, picked up with a 6.2% increase from 2.5% in the third quarter. This figure remained strong even as investing in structures declined 4.2%, or the largest drop since the third quarter of 2017.

Fixed investment growth of 3.9% – versus 1.1% in the third quarter – was driven by spending in research and development. R&D spending totaled $425 billion in the fourth-quarter, representing a 9.9% year-over-year increase.

“Private R&D spending now represents 2.3% of US GDP, an all-time record,” Neil Dutta, head of economics at Renaissance Macro Research, wrote in an email. “R&D spending is usually a good sign for future productivity growth. If secular stagnation is a thing, U.S. firms are fighting like hell to avoid it.”

The BEA typically releases three prints on gross domestic product for each quarter. However, Thursday’s results take the place of the first two estimates for fourth-quarter GDP, as the first print was delayed due to the 35-day partial government shutdown.

The protracted shutdown also impacted the release of key data factoring into the ultimate measure of gross domestic product. The data that has trickled in for December over the past several weeks, however, had painted a stormy picture of the U.S. economy in the fourth quarter.

While the economy grew robustly at the start of 2018, a host of economic data softened at the end of the year amid factors including a tighter monetary policy environment and turmoil in financial markets.

Although the stock market cannot be conflated with the broader economy as a whole, recent economic data – much of which factored into the reading on GDP – had pointed to corresponding weakening in many key economic areas at the end of 2018, particularly in housing and manufacturing. Retail spending was also a central concern after Census Bureau data pointed to the largest drop in retail sales in December since September 2009.

These concerns, however, did not prove too heavy a drag on this print for GDP.

“While it’s lower than what we’ve seen in the past two quarters it’s still solid compared to years past—that it tops expectations by a considerable amount could help fuel the rally we’ve enjoyed so far this year,” Mike Loewengart, vice president of investment strategy at E-Trade Financial Corporation, said in an email. “It’s also a major signal that slowing global growth has not yet come home to roost here in the U.S. That said, it’s one economic signal of many, and amid the chorus of market watchers predicting the booming economy is beginning to slow, investors should remain alert.”

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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