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GDP:  Business Investment Drives Upside Surprise

February 28, 2019
Bottom Line: The delayed report of 4th Quarter 2018 GDP was stronger than expected as business investment surprised to the upside. A combination of what would normally be the "advanced" and "second estimate" due to the shutdown, this report showed consumption was up 1.9% and business fixed investment was up 0.8%, while net exports were a drag and government spending was a small positive. Looking through volatility in business fixed investment, the trend rate of GDP is decelerating again, likely settling back into the 2.25 - 2.75% range as consumers reset after a two-quarter stimulus from tax cuts.

Gross Domestic Product ROSE by 2.6% in the 4th Quarter, higher than market expectations for an increase of 2.2%. During the 9.0 years of economic expansion, the economy grew at an average annual rate of 3.0% after declining at a 2.9% rate during the recession. Economic activity is now 3.1% ABOVE its year ago level and 25.3% ABOVE its pre-recession 2007 Q4 cyclical peak.

Inventory Investment ROSE by $7.3 billion, adding 0.13 percentage points to overall economic activity. Consequently, Real Final Sales ROSE by 2.5% and is now 2.7% ABOVE its year ago level. Additionally, Imports ROSE by 2.7% and Exports ROSE by 1.6% so Net Exports FELL by $13.5 billion.

This implies that Real Final Domestic Demand ROSE by 2.6% and is now 2.9% ABOVE its year ago level.

Consumer Spending ROSE by 2.8%, contributing 1.92 percentage points to economic growth.

Business Investment ROSE by 6.2%, adding 0.82 percentage points to GDP. Intellectual property products increased by 13.1% while non-residential structures declined by 4.2%.

Residential Investment FELL by 3.5%, subtracting 0.14 percentage points to economic growth.

Finally, Government Purchases ROSE by 0.4%, adding 0.07 percentage points to GDP. This was its 8th positive contribution in the last 12 quarters.

The GDP Price Index ROSE by 1.8%, compared with market expectations of 1.7%. This is also 2.2% ABOVE its year ago level.