Economy slows to 2.6% in 4th quarter, GDP shows, but consumers and businesses show plenty of resilience

on Feb28
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The growth rate in the U.S. economy touched down at a modest 2.6% in the 2018 fourth quarter.

The numbers: A slumping housing market and bigger trade deficit softened up the economy in the final three months of 2018 after a torrid spell of growth in the middle of last year, but consumers and businesses still showed plenty of resilience despite increasing headwinds.

Gross domestic product, the official scorecard for the economy, grew at a 2.6% annual pace in the fourth quarter, the government said Thursday. Economists polled by MarketWatch had forecast a 1.9% increase.

The U.S. had expanded at a lusty 3.4% clip in the third quarter and 4.2% in the second quarter.

The dropoff at the end of 2018 kept the U.S. from reaching 3% annual growth for the first time since 2005. GDP ended up at 2.9% for the full year, matching 2015 as the biggest increase since the end of the 2007-2009 Great Recession.

The partial government shutdown that began shortly before Christmas may have been enough to prevent the economy from hitting the 3% mark. The shutdown may have cost the economy 0.1 percentage point of growth in the fourth quarter, the Bureau of Economic Analysis said.

Read: The rise of the robots and decline of inflation: How AI is keeping prices low

What happened: Consumer spending, the main engine of the economy, increased a healthy 2.8% in the fourth quarter. Households didn’t spend as much as they did in the previous two quarters, but it was more than enough to keep the economy on a steady keel.

Businesses investment, meanwhile, was a lot stronger than expected.

Companies invested more in equipment and intellectual property, offsetting another decline in spending on structures such as drilling rigs or office buildings.

In a big surprise, firms also increased the value inventories by $97.1 billion — even more than in the third quarter. Other reports had suggested inventories would shrink.

The housing market, as expected, was weak again. Investment in new construction fell 3.5%, marking the fourth drop in a row.

Another big drag on the economy was a wider trade deficit. Imports climbed 2.7% to outpace a 1.6% gain in exports. U.S. exporters were hindered by retaliatory tariffs, a weaker global economy and stronger dollar.

The rate of inflation slowed a bit. The PCE index rose at a 1.5% pace in the quarter, with the core rate that excludes food and energy up 1.7%.

Read: Small-town U.S.A. falls further behind urban America in job opportunities

Big picture: The fourth-quarter GDP report is mainly a look in the rearview mirror, but it does show the U.S. economy slowed toward the end of 2018.

Earlier reports on the economy suggest perhaps even slower growth in early 2019 — the first quarter is typically the weakest of the year — but the U.S. is still on track to set a record for longest economic expansion early this summer.

Read: Consumer confidence rebounds after Wall Street rally, end of shutdown

Market reaction:The Dow Jones Industrial Average

DJIA, -0.28%

and S&P 500

SPX, -0.05%

were set to open lower in Thursday trades. The 10-year Treasury yield

TMUBMUSD10Y, +0.20%

slipped to 2.67%.

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