COLUMN-Battered by trade war, U.S. economy ended last year on weak note: Kemp

(John Kemp is a Reuters market analyst. The views expressed are his own)

* Chartbook:

LONDON, Jan 31 (Reuters) – U.S. businesses ended last year subdued, according to preliminary estimates for economic activity in the fourth quarter released by the government on Thursday.

Real gross domestic product rose at a seasonally adjusted annualised rate of 2.1% in the three months from October to December, the Bureau of Economic Analysis reported in an advanced estimate.

Positive contributions came from lower imports (+1.3 percentage points), higher consumer spending (+1.2 points), faster government expenditures (+0.5 points) and a slight improvement in exports (+0.2 points).

That helped offset a negative contribution to growth from a big drawdown in business inventories of raw materials, work in progress and unsold products (-1.1 percentage points).

But a better measure of underlying domestic demand and economic momentum excludes volatile inventory changes, government spending and trade effects.

Real final sales to private domestic purchasers increased at an annualised rate of just 1.4% in the fourth quarter of 2019, the slowest since the fourth quarter of 2015 and before that the second quarter of 2013.

Real private fixed non-residential investment in structures, equipment and intellectual property shrank at an annualised rate of 1.5%.

Non-residential fixed investment has now declined for three quarters running, the longest downturn since the recession of 2008/09.

Sluggish output growth is consistent with data showing relatively subdued rates of employment creation in the final three months of last year (

U.S. manufacturing employment was up by just 0.5% in the three months from October to December compared with the same period a year earlier, the slowest rate of job creation for two and a half years.

Private sector services suppliers increased employment by around 1.7% year-on-year in the final three months, little changed from earlier in the year, but a deceleration from 2016 and prior years.


Employment in services tends to be less volatile than in manufacturing; the services sector effectively acts as a flywheel stabilising the labour market and the overall economy.

And as services have increased their share of employment and GDP in recent decades, the business cycle has become more muted, with the exception of the deep recession that followed the financial crisis of 2008/09.

Nonetheless, services employment and output tend to track changes in manufacturing and the two are not totally independent, so the slowdown in manufacturing job creation threatens to spread to the rest of the economy.

The reasons are not hard to find. The U.S./China trade conflict, increased business uncertainty and a sharp slowdown in business investment spending all hit the economy hard in 2019.

The resulting slowdown likely encouraged the White House to reach a phase one trade agreement with China to avoid it turning into an outright recession in 2020.

But the economy finished the year on a relatively weak note, with business surveys, manufacturing production excluding motor vehicles, and now final domestic sales growth all decelerating to multi-year lows.

Until recently, most investors and oil traders seemed convinced the fourth quarter would mark a turning point, with growth accelerating again following cuts in U.S. interest rates and the signing of a trade truce.

However, data for the end of the year has been softer than anticipated and the outbreak of coronavirus in China has created greater uncertainty about the recovery of the global economy in the first half of 2020.

Downgraded confidence in the recovery has now filtered through into a retreat in the major U.S. equity indices and a sharp drop in Brent prices, as traders mark down their forecasts for oil consumption growth this year.

Related columns:

– Priced for perfection, oil slides on fears coronavirus will hit demand (Reuters, Jan. 24)

– Oil prices rise on optimism about the economy in 2020 (Reuters, Dec. 17)

– U.S. economy set fair for 2020, provided trade truce holds (Reuters, Dec. 6) (Editing by Andrew Heavens)

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