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Economy Statement for the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association

(Archived Content)

The latest available data on real GDP showed that in the final quarter of 2016 the U.S. economy continued to expand and generate new jobs, if at a slower rate than the previous quarter.  Economic growth decelerated to an annual rate of 1.9 percent, following 3.5 percent in the third quarter.  Moderate growth in consumer spending, further improvement in business investment, a turn-around in residential investment, and a build-up of inventories all supported GDP growth in the fourth quarter.  A reversal in net exports emerged as a significant headwind, however.  Underlying fundamentals and rising sentiment are pointing to solid private domestic demand in coming months.  Although employment growth slowed in the fourth quarter relative to the third, the pace of job creation remained adequate to keep the headline unemployment rate low and stable.  In the fourth quarter of 2016, the unemployment rate averaged 4.7 percent, down from an average 4.9 percent in the third quarter, and well below the pre-recession norm of 5.3 percent.  Over the four quarters of 2016, real GDP grew by 1.9 percent, matching the rate over the four quarters of 2015.
GDP Growth
According to the advance estimate released last Friday, real GDP increased at an annual rate of 1.9 percent in the fourth quarter after rising at an annual rate of 3.5 percent in the third quarter.  Consumer spending continued to make a positive contribution to GDP growth but did slow somewhat, with real personal consumption expenditures growing at an annual rate of 2.5 percent in the fourth quarter, following an annual rate of 3.0 percent in the third quarter.  Private domestic final purchases – the sum of consumption, business fixed investment, and residential investment – accelerated in the fourth quarter to an annual rate of 2.8 percent, up from 2.4 percent in the third quarter.  This measure, which excludes government spending, exports, imports, and inventories, better portrays the strength of underlying private demand in the economy.
The pace of business fixed investment improved noticeably in the fourth quarter, growing by 2.4 percent after an increase of 1.4 percent in the third quarter, although performance was mixed across the subcomponents.  Equipment investment grew 3.1 percent, reversing a 4.5 percent decline in the third quarter, and outlays for intellectual property products advanced by 6.4 percent, extending a 3.2 percent gain in the previous quarter.  However, spending on structures declined 5.0 percent, taking back some of its 12 percent gain in the third quarter. 
Private inventory investment boosted real GDP growth by 1.0 percentage point in the fourth quarter after adding 0.5 percentage point in the third quarter.  This marked the first back-to back quarterly inventory build since early 2015, and followed five consecutive quarters during which firms’ drawdowns of inventories posed a lengthy and sizable drag on real GDP growth.
Residential investment also turned around sharply in the fourth quarter, jumping by 10.2 percent, after declining by 4.1 percent in the third quarter.  A variety of housing price indices continued to increase at a moderate pace in the fourth quarter, supported by low inventories of homes available for sale.  Although mortgage rates have increased recently, they remain quite low in historical terms, and recent surveys of homebuilder confidence show continued high levels of optimism.
On net, government spending made a somewhat more positive contribution to growth in the fourth quarter compared with the previous quarter.  State and local government spending grew by 2.6 percent, after a slight decline in the third quarter, while federal outlays fell by 1.2 percent, following the third quarter’s 2.4 percent advance.  Overall, government spending grew by 1.2 percent, compared with growth of 0.8 percent in the third quarter.
Net exports posed a significant drag on growth in the fourth quarter, subtracting 1.7 percentage points from real GDP and offsetting the 1.7 percentage point gain from personal consumption.  A decline in export growth coupled with much faster growth in imports accounted for this sharp reversal from the nearly 0.9 percentage point contribution made by net exports in the third quarter, which followed from a transitory surge in soybean exports.
Labor Markets and Wages
In 2016, monthly job growth averaged 180,000, slowing a bit from the monthly pace of 299,000 in 2015.  The unemployment rate ended the year at 4.7 percent, less than half its 2009 peak of 10 percent.  In the fourth quarter, payrolls expanded at an average pace of 165,000, compared with an average pace of 233,000 in the third quarter.  The unemployment rate is now below the 2002-2007 average of 5.3 percent; levels of initial claims for unemployment insurance remain near 40-year lows.  The January employment report will be released this coming Friday. 
Nominal wage and compensation gains are gaining steam.  Nominal hourly earnings for all private-sector employees rose 2.5 percent over the year ending in December 2016, well above the 1.4 percent average seen between 2013 and 2015.  The Employment Cost Index for wages, salaries and benefits in private industry has also picked up in recent quarters; data on this index for the fourth quarter of 2016 will be released tomorrow. 
Although higher oil prices have contributed to a pick-up in headline inflation, consumer price inflation remains relatively low and core inflation remains stable.  The Consumer Price Index (CPI) for all items increased 2.1 percent over the year ending in December, up from a 0.7 percent rate over the preceding 12 months.  Energy prices were up 5.4 percent and gasoline prices were up 9.1 percent over the year ending in December.  Food prices were down 0.2 percent over the same period; food prices have been declining on a year-over-year basis for the past four months, the first such stretch since early 2010.  Excluding food and energy, the CPI was 2.2 percent higher over the year through December, accelerating very slightly from its 2.1 percent rate over the twelve months ending in December 2015.
The Personal Consumption Expenditures (PCE) price index also showed subdued consumer inflation, with a 1.6 percent gain for the year ending in December 2016, compared with 0.6 percent for the year ending in December 2015.  Core PCE prices showed year-over-year growth of 1.7 percent in December, up from a 1.4 percent in December 2015.
The U.S. economy reached a firmer footing in the second half of 2016 after a weak first half. Real GDP grew 1.9 percent in the fourth quarter on the heels of a strong 3.5 percent rate in the third quarter; the headline unemployment rate stood at 4.7 percent in December; and growth in hourly wages picked up over the year.  Over the four quarters of 2016, the economy expanded by 1.9 percent.  The available indicators and information about economic fundamentals suggest the economy will continue to expand in coming months.