Q4 Real GDP Growth Still Good

Popular Economics Weekly

BEA.gov

Real gross domestic product (GDP) increased at an annual rate of 2.6 percent in the fourth quarter of 2018 (table 1), according to the "initial" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 3.4 percent. Due to the recent partial government shutdown, this initial report for the fourth quarter and annual GDP for 2018 replaces the release of the "advance" estimate originally scheduled for January 30th and the "second" estimate originally scheduled for February 28th. See the Technical Note for details.

The fourth-quarter GDP estimate surprised many analysts. Consumer spending rose 2.8 percent, despite the sharp drop in December retail sales, which is down from outsized rates of 3.5 and 3.8 percent in the prior two quarters but still good.

So why do jittery stock and bond investors keep waiting for the ‘other’ shoe to drop with growth so good? We know a major reason for the record low interest rates is the huge amount of excess liquidity not being invested in productive assets, but chasing inflated stock values, which makes buying long term sovereign debt in particular such a safe investment.

It’s called running for cover when the geopolitical situation worsening and a US administration that cannot live without drama, ballooning trade wars and massive federal debt now predicted to reach 100 percent of GDP per the Congressional Budget Office by 2023.

The flight to quality syndrome keeps investors buying up sovereign government debt in particular, thereby keeping interest rates in line with the very low inflation rate, which is a good time to invest in public education, infrastructure, and the general welfare.

In fact, the 10-year Treasury yield has not been this low since the 1950s, when money was plentiful and U.S. economic growth was phenomenal, reaching 6 and 7 percent GDP growth rates after WWII, as I said in my last blog.

This is the reverse of conditions that led to the housing bubble bust. Housing prices became inflated in the early 2000s because inflation was rising faster than interest rates that Fed Chair Alan Greenspan kept reducing to pay for GW’s wars on terror.

What more drama can happen this time? There was little damage to date from the record 35-day government shutdown and loss of business activity, though the BEA says it kept the annual growth rate at 2.9 percent rather than 3 percent. But we can’t see yet how much this will affect 2019 growth.

Let’s hope we find a better way to invest the excess liquidity, if we want to maintain full employment and rising wages in 2019. January’s 304,000 new payroll jobs is a good start. The US has to be investing much more in productive enterprises, as I’ve said.

Business investment rose 6.2 percent for nonresidential fixed investment in Q4, back near the high single-digit increases of the first half of last year when the corporate tax cut was driving spending. Residential investment, however, was weak, down 3.5 percent for the fourth straight quarterly decline that offers definitive evidence of how weak the housing sector has become.

However, former chief economic advisor Jason Furman isn’t so optimistic about 2019 growth. “I’m not seeing a sustained supply-side expansion in the wake of the (2017) tax cuts,” he says.

That means productive investments haven’t been increased enough, and probably won’t, unless there’s more agreement on Capitol Hill about what’s really needed to keep this virtuous business cycle, and the financial markets, from collapsing in 2019.

Harlan Green © 2019

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