U.S. economic growth was revised up from the previous estimate. The biggest gain in three years in consumer spending drove the expansion.
Into the Headlines
GDP increased 2.9% in the last quarter of 2017 compared with the previously reported 2.5%, per the Commerce Department. Although it surpassed the 2.7% reading expected by a Reuters poll, it marked a slight decline from 3.2% reported in the previous quarter.
Consumer spending, which accounts for more than two-thirds of U.S. GDP, grew at its fastest pace in three years, increasing 4% in the final quarter of 2017 compared with 2.2% expansion in the previous quarter. However, imports were a drag, as it grew at an upwardly revised rate of 14.1% compared with the previously reported 14.0%, the fastest pace since the third quarter of 2010.
There are signs that GDP slowed further in Q1 2018, as investors take cues from retail sales data. Retail sales declined 0.1% in February against expectations of a gain of 0.3% after a 0.1% drop in the prior month and December. This was the first time since April 2012 that retail sales declined for three consecutive months.
Despite the weakness in retail sales, some analysts bet on economic growth reaching Trump’s 3% target in 2018 on the $1.5 trillion tax reform and increase in government spending. Government spending increased 3% in the quarter compared with previously reported 2.9%, the highest since the second quarter of 2015.
What’s the Fed Going to Do?
The Federal Reserve hiked interest rates by 25 basis points in Powell’s first meeting as chairman. The new benchmark funds rate was increased to a target of 1.5% to 1.75%. Although the Fed kept its forecast of two more hikes in 2018, it is too early to comment on what turn the U.S. economy might take in the rest of the calendar year.
“Tax cuts and stronger government spending will boost average GDP growth to 2.9 percent in 2018,” per a Reuters article citing Gregory Daco, chief U.S. economist at Oxford Economics. “We forecast this environment will lead the Fed to raise interest rates four times this year,” he added.