US economy maintains momentum as domestic spending shines through

The US economy remained robust in the final quarter of last year led by consumer spending and investment in capital equipment.

Headline GDP came in at 2.6% quarter-on-quarter (annualised) a little below market expectations of a 3% gain. However, the figure was depressed by a sharp drop in inventory and drag from net trade; effects that are likely to be related to reconstruction spending after the hurricanes and hence are likely to fade going forward. Final domestic sales, which exclude these components, grew at a very robust 4.3%.

Signs are that the strong momentum will carry over into the current quarter, with durable goods orders maintaining a healthy pace in December. New orders figures suggest that further increases in capex should be forthcoming. On the consumer side many companies have announced one-off bonuses following  the passage of the tax bill and alongside increases in minimum wages and continuing employment growth, incomes should be well supported. Meanwhile inventories are expected to bounce back.

So should we be bracing ourselves for a bumper quarter? Perhaps. However, whilst remaining positive on the US, we are cognizant of the “Q1 effect”, whereby GDP dips in the first three months of the year only to rebound in the second quarter. This would seem to reflect difficulties with seasonal adjustment which depress Q1 activity.

Our analysis suggests this effect may be fading but could  still take some 0.8 percentage points off real GDP in Q1. Nonetheless, on current trends such an effect would only turn a very strong reading into a strong one.