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  • US GDP increased 2.1% in Q4 2019
  • Increase despite a large drag from inventories that could unwind going forward
  • Domestic demand growth softened, but still posted solid 2.3% growth in 2019 as a whole

The US economy continued to grow at a solid rate in Q4 last year, despite still significant US-China trade disruptions over the period. Business investment edged lower for a third straight quarter – the longest such streak since 2009 – with the industrial sector continuing to feel the pinch from the US-China trade war. But consumer spending increased at a still relatively solid 1.8% pace (although that is down from a 3.1% increase in Q3) and residential investment growth picked up to its strongest pace in 2 years. Most of a large add to growth from net trade came from an almost 9% drop in imports, which is not exactly positive for the domestic demand backdrop. But some of the volatility in trade flows was probably related to shifting imports around US-China tariff hikes (both implemented and threatened). The boost from net trade in Q4 won’t likely be repeated, but neither will an offsetting sharp slowing in the pace of inventory accumulation.

On balance, US GDP still posted a solid 2.3% increase in 2019 as a whole, and that gain arguably looks better considering it was despite the drag from the US-China trade war on the industrial sector. Low interest rates have had something to do with keeping a floor under consumer spending. And the three 25 basis point Fed rate cuts last year also appear to be supporting a resurgence in spending on housing. We don’t expect the Fed to cut interest rates further in 2020 and capacity pressures (eg. the already low unemployment rate) are making it more difficult for the economy to grow at an ‘above-trend’ rate. But easing trade tensions with the signing of the US-China phase 1 deal earlier this month have also reduced go-forward downside risks for the industrial sector. We continue to expect respectable if unspectacular growth in the economy’s long-run trend growth rate at around 2%.

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