GDP Grew 2.6% at Year End, Extending Strong Stretch -- Update

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The U.S. appears to have entered a stage of stronger economic growth, years into a historically modest expansion.

Gross domestic product, the value of goods and services produced in the U.S., rose at a 2.6% annual rate in the fourth quarter, the Commerce Department said Friday.

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That failed to match the above-3% growth in the spring and summer quarters. But it was strong enough to extend one of the economy's best stretches in recent years. Output increased 2.5% in 2017, the most in three years, as American households and companies boosted spending broadly.

Output has risen an average of just over 2% during the expansion that began in mid-2009 -- the third-longest on record -- and has occasionally had bursts of stronger growth only to fall back to the modest trend. But with low unemployment, modest inflation, a booming stock market and renewed strength around the globe, the U.S. appears to be in a sustained pickup -- for now.

The report shows "the U.S. economy had plenty of momentum even before the tax cuts take effect this year," economist Michael Pearce of Capital Economics said in a note to clients, referring to a $1.5 trillion tax cut passed by Congress late last year. While warning "not to get carried away," he added: "It seems like nothing can go wrong for the U.S. economy in 2018."

President Donald Trump has pledged to return the economy to the above-3% growth it routinely posted during expansions in the 20th century. Few economists believe the economy can maintain such a pace these days, given an aging population and meager productivity gains.

But many believe 2018 will again be better than the 2% pace that has prevailed since the recession ended. A separate report Friday hinted at further increases in output, as orders at U.S. factories for long-lasting items known as durable goods rose 2.9% in December, driven by aircraft sales.

Driving the fourth-quarter burst in output was a solid increase in spending by Americans and businesses, whose spirits have risen sharply in recent years. Summer hurricanes also likely played a role, as consumers and firms who put off purchases during the storms made them up -- while also spending on repairs -- in the final three months of 2017.

Consumer spending rose at a 3.8% rate in the period, an increase last exceeded in late 2014. Spending on durable goods rose at the fastest rate since 2009. That likely reflects, in part, Americans buying new cars and other goods to replace items damaged in the storms.

A key category of business spending also broke out. Nonresidential fixed investment -- reflecting spending on commercial construction, equipment and software -- climbed at a 6.8% rate. For the year, such investment rose by a similar margin, posting the best 12-month gain in three years.

One factor that subtracted from growth: an expanding trade gap. While exports continued to rise in the fourth quarter, imports rose by a greater amount, as Americans stepped up purchases of foreign goods.

A measure of overall inflation rose at the fastest rate since 2011 but underlying inflation pressures remained subdued historically. The price index for personal-consumption expenditures rose at a 2.8% pace in the fourth quarter, in part due to higher oil prices. Core prices -- which exclude food and energy -- rose at 1.9% rate.

The current expansion, which began in mid-2009, is the third-longest on record and set to become the second-longest this spring. But it has also been stubbornly stuck in a modest pace, slower than the expansions in the 20th century.

Many economists expect the economy to maintain momentum this year, largely because of strong underlying growth but also due to the tax cuts passed last year.

Write to Josh Mitchell at joshua.mitchell@wsj.com

Eight years into what has been an unexpectedly slow expansion, the U.S. economy appears to have picked up steam.

Business executives have reported solid quarterly earnings in recent weeks and pointed optimistically to investment and hiring plans for 2018, supported in part by federal tax cuts. Stock prices keep churning higher. And on Friday the Commerce Department reported that U.S. economic output remained on an above-trend path in the final three months of last year.

Gross domestic product -- the value of goods and services produced in the U.S. -- rose at a 2.6% annual rate in the fourth quarter, the government said. That didn't match the second and third quarters' above-3% growth rates, but it exceeded the 2% average that has prevailed since the early 2000s. Output grew 2.5% in 2017 as a whole, the most in three years, and the Federal Reserve predicts 2.5% growth again in 2018.

That puts the economy in unusual territory: not quite booming, but still gaining momentum deep into an expansion. The growth cycle that began in mid-2009 already ranks as the third-longest ever and is set to become the second-longest this spring. Rather than fizzling, the expansion is being spurred on by robust consumer spending and business investment. It isn't near the vigor of the late 1990s, but that was the last time growth clearly accelerated this deep into an expansion.

"We don't have a lot of history to guide us here," said Richard Moody, chief economist of Regions Financial Corp. "It is unusual to see what looks to be a strong acceleration this late in the cycle."

Investors cheered the latest evidence of an economy that won't quit, driving up the Dow Jones Industrial Average by more than 100 points, or 0.4%, at midday.

President Donald Trump has pledged to return the economy to a growth rate of 3% or more, pinning his agenda on a $1.5 trillion tax cut he signed into law last month, a rollback of environmental, labor, financial and other regulations, and tougher trade positions. By Mr. Trump's standard, growth didn't measure up in the fourth quarter, but the pickup that has played out over the past nine months still has given the president something to boast about.

"There has never been a better time to hire, to build, to invest and to grow in the United States," he said to business and political leaders in Davos, Switzerland Friday. "America is open for business and we are competitive once again."

While many economists anticipate a further pickup this year, many also say 3% will be difficult to achieve over the long haul given an aging population and meager productivity growth.

Several developments are helping the economy perk up. Among them: Synchronized global economic growth and renewed investment spending by U.S. firms, who had spent years hunkering down. Those factors have converged with low unemployment, tame inflation, low interest rates and a booming stock market to bolster business and household optimism and spending.

Shelving manufacturer B-O-F Corp. of Aurora, Ill., spent about $750,000 to combine two factories into a larger, single plant that opened this year. The company, which builds slanted shelves in cases at grocery and convenience stores, is aiming to boost production capacity by a third with the new plant.

Jamie Knorring, B-O-F's president, credits the rebound in the housing market with his company's good fortune, including a fourth quarter that was the company's best ever.

"When they're building more houses, they need to build more stores," he said, adding the company plans additional factory upgrades and equipment purchases this year.

The global upswing is driving sales for Rockwell Automation Inc., the Milwaukee-based maker of factory software and hardware, as companies in a range of sectors look to boost productivity. Rockwell said this week its fiscal first-quarter revenue jumped 7% to $1.6 billion, driven by sales to heavy industry and energy companies.

Through Friday, 26% of S&P 500 companies have reported quarterly results, and out of those 76.69% beat earnings-per-share expectations. The current growth rate for earnings compared with last year is 12.3%.

Firms that earlier in the expansion focused on boosting payrolls while labor was cheap now appear to be renewing investment in facilities and equipment.

Stronger domestic demand prodded Heartland Produce Co., which sells fresh fruits and vegetables to grocers in the Midwest, to recently add 4,000 square feet to its warehouse in Kenosha, Wis.

"With the economy being stronger and unemployment being low, people have more buying power and they're spending it at the store," Heartland President Bill Dietz said in an interview. He said his company might look at opening another facility this year.

Investment in business equipment expanded at an 11.4% annual rate in the fourth quarter after a 10.8% growth rate in the third, the best six-month stretch since a burst of activity in mid-2014, Friday's economic-output report showed.

While they were investing more, businesses pared back their inventories in the fourth quarter, which helped to reduce output. Inventory rebuilding could boost output in the months to come.

Consumers are driving growth, too. Consumer spending rose at a 3.8% rate in the period, an increase last exceeded in late 2014. Spending on long-lasting items known as durable goods rose at a 14.2% rate, the fastest pace since 2009.

David Alter, 34 years old, spent much of the past decade building his savings and investing in stocks. In December, he bought a car and a second home, in Orlando, Fla., where he just started a new job as a technology manager for a major theme-park company. He said the new job coupled with a big rise in technology stocks he owns gave him the confidence he needed to take on a second mortgage, a fixer-upper for which he just bought a new heating and ventilation system.

"I feel very good on how things are performing," he said of the economy. "But it does make me worry like when that's going to stop. It can't ride up forever."

There are other reasons for caution. A chunk of the fourth quarter's growth likely reflected a temporary boost in spending related to a pair of hurricanes that ripped through Texas and Florida last summer. Spending that was halted by the storms -- such as restaurant visits by consumers and construction -- was simply pushed back into the year's final stretch. Likewise the storms spurred a temporary boost in spending on repairs and replacement items, like cars.

The global upswing is a two-edged sword for the U.S. Exports are rising, but so are imports. So while consumer spending is on an upswing, many of the goods Americans are buying are being produced abroad. That runs against Mr. Trump's "America First" agenda. A widening trade deficit subtracted more than a percentage point from growth in the fourth quarter, the Commerce Department said. That came even though the dollar has weakened, a development that should be improving the U.S. trade position by making imports more expensive and exports cheaper.

--Andrew Tangel contributed to this article

Write to Josh Mitchell at joshua.mitchell@wsj.com

(END) Dow Jones Newswires

January 26, 2018 15:47 ET (20:47 GMT)

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