A surprise jump in business spending boosted fourth-quarter growth to 2.6 percent, but economists say the first quarter could expand at half that pace due to the government shutdown and a sluggish consumer.
Fourth-quarter GDP topped the 2.3 percent expected by economists, due in part to a 6.7 percent increase in equipment spending and a 13.1 percent jump in intellectual property, which includes software. The pickup was a surprise after weak durable goods spending data in the quarter.
While business expenditures look better, economists say the sharp drop in retail sales in December signals a weaker consumer at the start of the year. That will make for a tougher comparison, and even before the fourth-quarter report, economists were looking for first-quarter growth below 2 percent with a pickup in the second half.
Consumers at the end of 2018 were facing the stock market's sharp holiday season decline, the prospect of a government shutdown and rising interest rates. The government remained shutdown for most of January, but consumers are now showing signs of a rebound with an unexpected jump in consumer confidence in February.
"The White House, and fairly so, can claim bragging rights for 2018. The real question is the first quarter. You're well under 2 percent. Are you under 1 percent? We don't know yet," said Joseph LaVorgna, Natixis chief economist for the Americas.
The Bureau of Economic Analysis said 2018 growth was 2.9 percent, a calculation derived by averaging growth in each quarter, but Wall Street economists who measure growth on a fourth-quarter-over-fourth-quarter basis say growth was 3.1 percent for 2018, up from 2.5 percent for 2017.
By either measure, the growth rate was close to the 3 percent the Trump administration promised would be generated by its economic policies. But the first half of 2018 already looks to be well below that pace, even if the second quarter picks back up, as economists expect. The final GDP number for fourth quarter will be released on March 28, and it could be revised in either direction.
The pickup in business spending, therefore, is critical. If it continues, it could dispel some doubts that corporations are not using tax proceeds for investment but for things like stock buybacks and dividends. It also suggests there may have been less delayed spending because of uncertainty surrounding trade.