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Friday May 29th, 2020 10:30AM

US economy grew modestly last quarter against a hazy outlook

By The Associated Press
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WASHINGTON (AP) — The U.S. economy expanded at a moderate 2.1% annual rate in the final three months of 2019, capping a year when a weak global landscape and a sharp pullback in business investment resulting from President Donald Trump's trade fights combined to slow growth.

The fourth-quarter rise in the gross domestic product — the economy’s total output of goods and services — matched the third-quarter gain, the government said Thursday. For all of last year, economic growth — 2.3% — was the weakest since Trump's election in 2016.

The picture that emerged Thursday from the government's first estimate of growth in the October-December quarter was a mixed one: Consumers kept spending, but they have grown more cautious. Incomes are rising but at a slower pace. Most alarmingly, businesses have been sharply reducing their investment as Trump's ongoing trade fights have heightened uncertainty for corporations.

At the same time, low interest rates, low inflation and a robust job market have given consumers and home buyers the means to keep fueling steady, if only modest, growth. Global risks — including potentially severe economic damage from China's viral outbreak — will continue to overhang the economy. But they're also likely to persuade the Fed to keep interest rates low and perhaps even further reduce them if the threats to the economy escalate.

Many economists saw Trump's decision to lower trade tensions by signing a Phase One agreement with China as key to lowering the risk of a recession this year.

'"The economic fundamentals are very solid right now," said Gus Faucher, chief economist at PNC. “Some of the downside risks that the Federal Reserve had been concerned about have faded now that we have a Phase One trade deal.”

Lawrence Kudlow, head of the president's National Economic Council, said Thursday he expects GDP growth will be helped in the coming year by the new trade deal with Canada and Mexico, and the commitments by the Chinese to boost purchases of U.S. exports.

“China has to work its way through this health crisis, but I think once that abates, you will see big export" gains, Kudlow told reporters at the White House.

For the October-December quarter, growth was supported by solid but slower consumer spending and an improvement in the trade deficit. Those factors offset a further drop in business investment in new plants and equipment and a slowdown in businesses' restocking of store shelves.

The full-year 2.3% growth of GDP in 2019 marked a sharp drop from the 2.9% gain in 2018, when the economy enjoyed a boost from Trump’s tax cuts and from billions in increased government spending.

Most economists foresee even slower growth in 2020 of around 1.8%. That assumes no serious damage from the coronavirus or other threats.

Even the U.S. elections for the White House and Congress could end up weakening growth if the campaigns were to further elevate uncertainty among consumers and businesses and thereby lead them to cut back on spending.

Under Trump, GDP growth has so far fallen well short of his campaign pledges. But unemployment has reached a 50-year low during his presidency. And after trade tensions with China began to cool late last year, the stock market rebounded and attained new highs.

Mark Zandi, chief economist at Moody's Analytics, said the presidential election may turn on how the economy is faring in key swing states.

“What really matters is the economy in Pennsylvania, Michigan and Wisconsin,” Zandi said. '"There things are not going well because the trade war has done a lot of damage in those states."

For the fourth quarter, consumer spending, which accounts for about 70% of economic activity, slowed to an annual gain of 1.8%. That was down from an annual spending surge of 4.6% in the second quarter and 3.2% in the third quarter. The slowdown was led by a drop-off in new car sales.

Business investment spending fell for a third straight quarter, dropping at an annual rate of 1.5%, a decline that has been blamed on business uncertainty generated by the rising trade tensions. The hope is that business will start investing again now that the Trump administration has declared a trade ceasefire with China.

Trade contributed to growth in the fourth quarter with imports, which subtract from U.S. growth, falling much faster than exports. That trend added 1.5 percentage points to growth in the quarter. But economists see this trend as only temporary: Many U.S. businesses had accelerated their pace of imports in the July-September quarter to get ahead of an expected increase in Trump's import taxes. As a result, they needed fewer imports in the October-December quarter.

Business stockpiling subtracted a full percentage point to growth, with part of that blamed on the General Motors strike that cut into car inventories.

___

AP White House reporter Darlene Superville contributed to this report

  • Associated Categories: Associated Press (AP), AP Business, AP Business - Economy
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