US Q4 GDP Expansion Brakes Due to Dismal Foreign Trade, Structural Weakness

Economic growth slowed more than forecast in Q4 as the trade deficit widened, consumer spending ebbed, and domestic investment picked up only slightly, partly due to a major drop in real estate investment.

Kristian Rouz – The Donald Trump administration is facing a tough challenge bringing the US economy back on track as fourth quarter growth figures have turned out to be a sheer disappointment, supporting the view that the current macro situation is one of the slowest recoveries in US economic history. Against the backdrop of fairly optimistic Q3 growth figures, released immediately prior to the last year's elections, the reported deterioration in US foreign trade and slow domestic investment in Q4 have revealed the lingering structural deficiencies in the US economy.

US economic expansion braked more than expected at the close of 2016 amid the greatest decline in six years in US foreign trade and lukewarm consumer spending. Business investment increased only slightly, uplifted by the optimistic expectations from the Trump presidency, who was elected into office in the midst of the fourth quarter. Although the outlook into 2017 looks somewhat brighter, the new White House administration has to take urgent steps in order to dodge a recession.

In particular, the Trump administration needs to curb imports and boost exports, spur the real disposable incomes of the American workers to be translated into consumer confidence, decisively encourage domestic private-sector investment through deregulation, and contain the financial markets from an excessive expansion, levelling the discrepancies between the weak real economy and the skyrocketing Dow Jones Index, amongst other things.

US GDP rose an annualised 1.9pc in Q4, the Commerce Department said in the early hours of Friday, compared to the 3.5pc growth reported for the third quarter. Compared to the 1-perent growth from the first half of 2016, the Q4 estimate looks more realistic than the Q3 figures from just before the election. This lends credibility to the upbeat Q3 figure as designed to make the Democrat administration look good on the election's eve.

The US economy thus expanded only 1.6pc in 2016, supporting Trump's viewpoint of the current growth cycle as its worst recovery in 75 years. In 2015, the economy grew 2.5pc.

Foreign trade was the main drag on US growth in Q4, falling 1.7pc, as the trade deficit has deepened amidst an influx of foreign-made goods into the US market. The dollar's strength is to blame, again, in line with Trump's earlier assessments regarding the "too strong" dollar hurting the US economy. A stronger dollar renders foreign-made goods cheaper and more competitive compared to US-made goods in the markets both in the US and globally.

Previous expectations called for 2.2pc growth for the fourth quarter.

The dismal growth looks paradoxically strange, in particular, with the US labour market in near "full employment": the jobless rate is roughly 5pc. Additionally, the Federal Reserve's base borrowing costs are still very low, at 0.5-0.75pc. That said, all the wealth generated by the cheap credit and a lot of people at work are being wasted by the structural inefficiency of the US economy, struggling amidst excessive regulation and bureaucratic interference, prohibitively high taxes, crippled productivity, and general mismanagement.

Consumer confidence and business investment posted signs of acceleration after Trump was elected on November 8. US domestic consumption makes up some 70pc of the US GDP, and it rose 2.5pc year-on-year in Q4. Business inventories rose to $48.7 bln in 4Q16 compared to $7.2 bln in Q3m while spending on heating and machinery rose 3.1pc year-on-year in the fourth quarter.

Combined, private domestic consumer and business spending rose 2.8pc in Q4 year-on-year compared to 2.5pc in the third quarter.

"The economy has strong underlying fundamentals," Ryan Sweet of West Chester, PA-based Moody's Analytics Inc., said prior to the Commerce Department's report being released. "Growth should accelerate this year."

However, real estate investment sunk 5pc as ultra-high property prices and less affordable credit, as well as stagnant salaries and wages, staved off the consumer demand for housing. Net exports fell by another 1.7pc in Q4 GDP, the most since mid-2010: The US trade deficit widened further. Meanwhile, after-tax incomes rose 1.5pc year-on-year, a three-year lowest, undermining the outlook on consumer demand. The savings rate dropped from 5.8pc to 5.6pc.

These figures reflect the concerns of the US economy as fairly misbalanced and contradictory, with a sustainable situation in some sectors, and despair in others. In a broader picture, all this reflects the immediate necessity to take measures to the make the US economy productive again, which is up to the current White House administration.