US economy misses Trump's 3 percent growth target in 2019

Lucia Mutikani, Reuters

Posted at Jan 30 2020 10:09 PM

WASHINGTON - The US economy missed the Trump administration's 3 percent growth target for a second straight year, posting its slowest annual growth in three years in 2019 as the slump in business investment deepened amid damaging trade tensions.

The economy grew 2.3 percent last year, the Commerce Department said on Thursday. That was the slowest since 2016 and followed the 2.9 percent notched in 2018. The 3 percent growth target has remained elusive despite the White House and Republicans' $1.5 trillion tax cut package, which President Donald Trump had predicted would lift growth persistently above that target.

The department's snapshot of gross domestic product, however, showed the economy maintaining a moderate pace of growth in the fourth quarter, thanks to a smaller import bill. The report suggested 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.

It followed on the heels of the Fed deciding to keep rates unchanged. Fed Chair 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.

Gross domestic product increased at a 2.1 percent annualized rate in the fourth quarter, matching the third-quarter pace, as lower borrowing costs encouraged purchases of motor vehicles, houses and other big-ticket items. Growth was also lifted by increased government spending. That helped to offset the drag from a slower pace of inventory accumulation.

Economists polled by Reuters had forecast GDP rising at a 2.1 percent rate in the fourth quarter. Excluding trade, inventories and government spending, the economy grew at a 1.4 percent rate in the fourth quarter, the slowest in four years. This measure of domestic demand rose at a 2.3 percent pace in the third quarter.

Economists estimate the speed at which the economy can grow over a long period without igniting inflation at around 1.8%.

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 percent on a 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.

Business investment fell at a 1.5 percent rate in the fourth quarter. It was the third straight quarterly decline and the longest such stretch since 2009. There were decreases last quarter in spending on nonresidential structures and business equipment.

Trade tensions have eroded business confidence and weighed on capital expenditure. With confidence among chief executive officers remaining low in the fourth quarter after dropping to a 10-year low in the prior quarter, a rebound is unlikely soon.

Business investment is also seen pressured by Boeing's suspension this month of the production of its troubled 737 MAX jetliner, which was grounded last March following two fatal crashes. Boeing on Wednesday reported its first annual loss since 1997.

Growth in consumer spending, which accounts for more than two-thirds of US economic activity, slowed to a 1.8 percent pace after rising at a brisk 3.2 percent rate in the third quarter.

A decrease in imports in the fourth quarter, in part because of US tariffs on Chinese goods, compressed the trade deficit. Trade added 1.48 percentage points to fourth-quarter GDP growth. But the decline in imports in the fourth quarter resulted in businesses almost depleting inventories in warehouses. A 40-day strike at General Motors also weighed on motor vehicle inventories.

Inventories rose at a $6.5 billion rate in the fourth quarter, the smallest gain since the second quarter of 2018, after increasing at a $69.4 billion pace in the July-September quarter. Inventory investment chopped 1.09 percentage points from GDP growth last quarter. (Reporting by Lucia Mutikani; Editing by Dan Burns and Andrea Ricci)