US economy growing moderately in fourth quarter

The US economy likely maintained a moderate pace of growth in the fourth quarter, and probably again fell short of attaining the Trump administration’s coveted but elusive 3 percent annual growth target because of slumping business investment amid damaging trade tensions.

The Commerce Department’s snapshot of gross domestic product on Thursday will likely show the Federal Reserve’s three interest rate cuts in 2019 helped to keep the longest expansion in history, now in its 11th year, on track and avert a downturn.

Growth is, however, slowing as the stimulus fades from the White House and Republicans’ huge tax reductions in 2018, a package President Donald Trump had predicted would lift growth persistently above 3 percent. So far it has fallen short of that goal.

The report comes on the heels of the US Federal Reserve deciding to keep rates unchanged. Fed Chairman Jerome Powell told reporters on Wednesday the US central bank expected “moderate economic growth to continue” but also nodded to some risks, including the recent coronavirus outbreak in China.

The Trump administration’s 18-month-long trade war with China last year fueled fears of a recession. Though the economic outlook has improved with this month’s signing of a Phase 1 deal with Beijing, economists do not see a boost to the economy as US tariffs remained in effect on $360 billion of Chinese imports, about two-thirds of the total.

“The economy has clearly slowed, but we are not barreling toward a recession,” said Ryan Sweet, senior economist at Moody’s Analytics in West Chester, Pennsylvania. “The economy is coming off its sugar high in 2019 so is not surprising that we are settling back into the growth rates that we saw prior to the fiscal stimulus.”

Gross domestic product probably increased at a 2.1 percent annualized rate in the fourth quarter as lower borrowing costs encouraged purchases of motor vehicles, houses and other big ticket items, according to a Reuters survey of economists. A smaller import bill and more government spending are also seen keeping GDP growth at the same pace logged in the third quarter.

The forecast was, however, made before Wednesday’s advance reports showing a sharp widening in the goods trade deficit in December as well as a drop in wholesale inventories. Retail inventories were unchanged last month. The data prompted some economists to cut their fourth-quarter GDP growth estimates by as much as five-tenths of a percentage point to as low as a 1.4 percent rate.

Growth estimates for 2019 are converging around 2.5 percent, which would be slower than the 2.9 percent notched in 2018. Economists estimate the speed at which the economy can grow over a long period without igniting inflation at around 1.8 percent.

The White House claimed that slashing the corporate tax rate to 21 percent from 35 percent, as well as shrinking the trade deficit would boost annual GDP growth to 3.0 percent on an sustainable basis. Economists have long disagreed, pointing to structural issues like low productivity and population growth. Some also argued that there was historically not a very strong relationship between corporate tax rates and business investment.

 “If you are trying to get to 3 percent in an economy in its 11th year of recovery that’s a tough task,” said Sung Won Sohn, business economics professor at Loyola Marymount University in Los Angeles. “There is a lot of uncertainty. Even though we have this initial trade agreement, I think there will be more trade wars after the (US presidential) election.”

Fed Chair Powell also said the risks from trade tensions remained and businesses were adopting a “wait and see attitude.”