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GDP: Miss Due to Volatile Components, Consumption Strong

January 26, 2018
Bottom Line: Larger than expected declines in inventory investment and net trade caused the first estimate of 4th Quarter GDP to miss expectations. While dashing hopes for a third straight quarter of 3+% annualized growth, the 2.6% pace was led by very strong consumption, up 3.8% and accounting for all of the quarter's gains. Both the net exports and investment are typically subject to significant revisions. So while the headline report missed expectations, the consumption component confirms an overall solid end to 2017.

Gross Domestic Product ROSE by 2.6% in the 4th Quarter, lower than market expectations for an increase of 3.0%.

During the 7.0 years of economic expansion, the economy grew at an average annual rate of 2.7% after declining at a 2.9% rate during the recession. Economic activity is now 2.5% ABOVE its year ago level and 15.2% ABOVE its pre-recession 2007 Q4 cyclical peak.

Inventory Investment FELL by $29.3 billion, subtracting 0.67 percentage points from overall economic activity. Consequently, Real Final Sales ROSE by 3.2% and is now 2.8% ABOVE its year ago level.

Additionally, Imports ROSE by 13.9% and Exports ROSE by 6.9% so Net Exports FELL by $55.1 billion. This implies that Real Final Domestic Demand ROSE by 4.3% and is now 2.8% ABOVE its year ago level.

Consumer Spending ROSE by 3.8%, contributing 2.58 percentage points to economic growth.

Business Investment ROSE by 6.8%, adding 0.84 percentage points to GDP. Intellectual property products increased by 4.5% while non-residential structures increased by 1.4%. Residential Investment ROSE by 11.7%, adding 0.42 percentage points to economic growth.

Finally, Government Purchases ROSE by 2.9%, adding 0.50 percentage points to GDP. This was its 8th positive contribution in the last 12 quarters.

The GDP Price Index ROSE by 2.4%, compared with market expectations of 2.3%. This is also 1.9% ABOVE its year ago level.