Consumer, Business Spending Propel Solid GDP Growth

After a month-long delay, investors finally have crucial context on economic growth through the end of 2018.

As shown in the LPL Chart of the Day, fourth quarter gross domestic product (GDP) grew 2.6% from the prior quarter, higher than consensus estimates for a 2.2% gain. GDP grew 2.9% overall in 2018 and 3.1% year over year for the fourth quarter.

Fourth Quater GDP Growth of 2.6% Beats Estimates

While the GDP is backward-looking, it provides important clues on what components of output have driven growth. In the fourth quarter, consumer spending was the biggest component of output growth, contributing 1.9%. However, business spending added 0.8%, higher than its average contribution of 0.5% over the past few years and an encouraging sign that growth in capital investments hadn’t slowed as much as some feared. Net exports were a 0.2% drag on growth amid a continuing U.S.-China trade dispute.

“We’re pleased by capital expenditures’ contribution to growth last quarter, as solid business spending growth will likely drive this leg of the expansion,” said LPL Research Chief Investment Strategist John Lynch. “We don’t expect a recession in 2019, and we have yet to see the red flags that in the past have signaled a large increase in recession risk.”

Today’s GDP report reinforced our recent adjustments to our 2019 economic forecasts. Earlier this month, we lowered our 2019 GDP forecast to 2.5% amid evidence that business and consumer spending growth were slowing. We still see signs of relatively muted increases in business and consumer expenditures that could cap output growth in the first quarter of 2019. However, we expect business and consumer sentiment to pick up this year as fiscal stimulus and solid economic conditions eventually prevail over global headwinds.

For more details on our economic forecasts for 2019, check out our Outlook 2019.

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