GDP grows above-forecast 2.6% as biz spending picks up

Washington

THE US economy cooled by less than expected last quarter as business investment picked up, suggesting growth could be stronger for longer as the Federal Reserve takes a patient approach to interest rates.

The 2.6 per cent annualised rate of gains in gross domestic product (GDP) from October to December compared with the 2.2 per cent median estimate of economists surveyed by Bloomberg. It followed a 3.4 per cent advance in the prior three months, according to a Commerce Department report on Thursday that was delayed a month by the government shutdown.

Consumption, which accounts for the majority of the economy, grew 2.8 per cent, slightly below forecasts, while non-residential business investment accelerated to a 6.2 per cent gain on equipment, software and research spending.

Government spending slowed, trade was a minor drag and inventories gave GDP a small boost.

The report shows how Republican-backed tax cuts may have continued to aid growth and help bring the full-year figure to 3.1 per cent, just above President Donald Trump's 3 per cent goal. While the expansion is poised to become the nation's longest on record at mid-year amid a still-healthy consumer, supportive Fed and robust labour market, the pace could cool amid the trade war, slowing global growth and fading impact of fiscal stimulus.

Growth, while slower than the prior two quarters, remains above both the average pace of the expansion and what the Fed sees as the economy's long-run potential of 1.9 per cent. Still, surveys and gauges such as Treasury yields indicate chances of a recession have increased in recent months while remaining unlikely for 2019.

Excluding the volatile trade and inventories components of GDP, final sales to domestic purchasers increased at a 2.6 per cent pace following 2.9 per cent.

The increase in consumer spending followed the third quarter's 3.5 per cent gain. It contributed 1.92 percentage points to growth. Drivers included health care, financial services and insurance, and other non-durable goods and services, while spending on food services and accommodations fell.

Thursday's report showed the Q3 slowdown in business spending may have been temporary. Non-residential fixed investment contributed 0.82 percentage point to growth following 0.35 point in Q3.

Within that category, spending on structures fell 4.2 per cent, the biggest drop in a year, a slowdown that may partly reflect falling oil prices. Business-equipment investment rose 6.7 per cent and intellectual property spending jumped 13.1 per cent.

Inflation remained muted, adding little urgency for the Fed to consider resuming interest-rate hikes. The GDP report showed the Fed's preferred price index rose at a 1.5 per cent annualised pace last quarter, below the central bank's 2 per cent goal. Excluding food and energy, the index rose 1.7 per cent. BLOOMBERG