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While the report reflected strength in business investment and consumer spending, some components weighed on growth. Residential investment contracted by 3.5 percent and has now fallen for four straight quarters, reflecting a slowdown in the housing market. This drop corresponds with other economic indicators, including, which showed that housing starts across the U.S. fell in December to the lowest level since September 2016. “The housing market is definitely struggling,” says Dan North, chief economist at Euler Hermes North America. “That’s providing a drag on GDP. If we had a little improvement there, the GDP number would be even better than it was.” Government spending increased at a 0.4 percent pace last quarter, after increasing by 2.6 percent in the prior three months. Subcomponents of this category offered some mixed signals. The government increased defense spending by 6.9 percent, the most in nine years, while nondefense spending contracted by 5.6 percent, the most in five years. This can be explained by the fiscal year 2018 budget, according to RSM’s Brusuelas. This plan was crafted by a Republican-controlled Congress, and it was designed to peak just before the midterm elections. At the same time, the report showed that companies are boosting investment on intellectual property, which includes items such as software and expenditures related to research and development. This category increased by 13.1 percent in 2018, following healthy increases in the first and second quarters of the year as well. This might mean a boost in productivity is coming, according to Brusuelas, something that. “This is a new-economy report,” Brusuelas says. “Through several quarters of investment like that, we should expect to see a lift of overall productivity, which would bode well for living standards and wages.” GDP report casts brighter light on wage growth
Wages have been tracking a slow, gradual climb throughout the current expansion, breaching 3 percent for the first time in nearly a decade just last October. It’s puzzled economists, who say tight labor markets typically lift worker pay. It’s also stood out to members of Congress, who in his semiannual testimony. But a measure included within the GDP report showed that disposable personal income grew by 4.2 percent, which might mean that there is a light at the end of the tunnel, according to North. Those figures — — also bode well for consumer spending, he adds. “People have the confidence, which gives you the willingness to spend. Now you’ve got income, which is giving you the ability to spend,” North says. “That paints a reasonably good picture going forward.” But rising wages could cause a pickup in inflation, one of the two components that the Fed is responsible for stabilizing. Modest inflation is one of the reasons why the U.S. central bank decided at its January rate-setting meeting. The report, however, shows that rampant inflation is still a minor concern. Personal consumption expenditures, the Fed’s preferred measure of price stability, came in at 1.9 percent last quarter. That’s just below the central bank’s target. That figure is “not going to cause much heartburn at the Federal Reserve,” Brusuelas says. “While growth is solid, it’s not strong enough to dislodge the Fed from its current policy path, nor will it cause the Fed to lose its patience. This growth data does not suggest that a rate increase is coming any time soon.” Growth will likely stabilize in the coming quarters, as the economy comes off of a sugar high from the tax cuts. Even so, questions about the future persist. “This is probably as good as it’s going to get,” North says. “You’ve got the Brexit worries out there. You have have a fairly large concern over slowing global growth. There’s lots of things that are still hanging out there.” Learn more
SHARE: Sarah Foster covers the Federal Reserve, the U.S. economy and economic policy. She previously worked for Bloomberg News, the Chicago Tribune and the Chicago Daily Herald. Brian Beers is the managing editor for the Wealth team at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money. Related Articles