U.S. Economy: Bustle and Muscle

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U.S. economic growth in the fourth quarter surprised on the upside with a GDP reading of 2.6% QoQ (2.9% YoY). Consumer spending pulled back a little from the third quarter, but still made a solid showing with a 2.8% increase for 4Q18. Consumer expenditures are the biggest contributor to economic growth. The snap-back in the consumer confidence index in February (post government shutdown), and the continuing vigorous employment outlook, temper the dismal December retail sales report and bode well for continued economic expansion.

In the 10 years since the recession, consumer spending has been mostly steady. Business spending, however, has been spotty. Companies have been reluctant to invest in nonresidential structures, equipment or intellectual property. As a result, worker productivity growth has been weak. Thus, the increase in nonresidential investment of 6.2% in the fourth quarter, even amidst uncertainty and market turmoil, is a welcome component of GDP and foreshadows an improving productivity outlook.

Productivity is the key to higher trend economic growth. We believe the tax cuts, regulation overhaul and strong corporate profits should provide some muscle to business spending in 2019. In another indication of a bustling economy, the February Chicago Purchasing Managers’ index (PMI) surged to levels not seen in more than a year and included a sharp pick-up in new orders. As February comes to a close, strong U.S. economic data, a patient Federal Reserve and progress in the U.S.-China trade talks generally have produced another positive month of market returns.

Please watch U.S. GDP on page 70 of the Global Perspectives Book.

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