US economic growth in real (inflation-adjusted) terms slowed in the fourth quarter to 2.6% (seasonally adjusted annual rate), the Bureau of Economic Analysis reported in today’s report on gross domestic product (GDP). The softer increase, which was expected, marks the second quarter of deceleration, slipping from Q3’s 3.4% gain and the strong 4.2% increase during last year’s Q2.
Despite the downshift in the quarterly comparison, the one-year trend for GDP continued to strengthen, albeit slightly by ticking up to 3.1% — the strongest gain in nearly four years.
How should we compare and contrast the mixed messages in the quarterly vs. annual GDP data? The annual trend is telling us that recession risk remained low through the end of last year and doesn’t appear set to rise any time soon. At the same time, the softer quarterly comparison implies that the rebound in the economic growth rate that began in late-2016 seems to be peaking. That still allows room for growth to endure in the foreseeable future, but probably at a rate that’s relatively stable at best.
Note that if we compare the annual trend for GDP in nominal terms (vs. the real or inflation-adjusted numbers cited above) there are signs that the stronger growth rate of the last several years is showing signs of topping out, albeit on the margins. As shown by the red line in the chart above, the year-over-year change in nominal GDP edged down for the first time since 2017’s Q2. That may be a clue that output will continue to ease in 2019.
The Capital Spectator’s econometric projection for the year-over-year change in real (inflation-adjusted) GDP is also projecting a softer trend for the near term. Using the average estimate via a set of forecasting models points to another round of annual 3.1% growth for this year’s Q1, followed by gradually lesser gains in the quarters ahead (based on the point forecasts).
The main takeaway: growth has peaked but the expected slowdown will be gradual, based on data published to date. In fact, the case for softer growth has been bubbling for months. Last November, for instance, I noted in the monthly business-cycle profile that “recession risk for the US remains low at the moment, but the signs are piling up that economic growth is slowing.”
Three months on, that’s still true. The only difference today: we have another hard-data update that strengthens the analysis.
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