United States’ GDP Revised Down to 2.2% in Q4 2018
Early this week, Indonesia sent a letter to United Nation secretary-general António Guterres opposing Beijing’ claims in the South China Sea - Photo: Special

JAKARTA (TheInsiderStories) – The United States (US) economic growth has been revised to 2.2 percent in the fourth quarter (Q4) of 2018, far below the 2.6 percent growth estimate issued in Feb. 28. But the revision didn’t change growth rates throughout 2018, which rose 2.9 percent, the most since 2015, and above 2.2 percent in 2017, said an official report on Thursday (03/28).

The US Department of Commerce reported, the decline was due in large part to the decline in world oil prices, in addition to softer consumer spending and a weaker climate for business investment.

The Agency detailed, personal consumption expenditure (PCE) contributed 1.66 percentage points for growth (1.92 percentage points in the previous estimate) and rose 2.5 percent (2.8 percent in previous estimates).

Then, spending rose less for items that were not durable (2.1 percent compared to 2.8 percent) and durable goods (3.6 percent compared to 5.9 percent) and increased 2.4 percent for services, the same as in previous estimates.

Meanwhile, non-residential fixed investment rose less than expected. Fixed investment contributed 0.54 percentage points for growth (0.69 percentage points in the previous estimate) and rose 3.1 percent (3.9 percent in previous estimates).

This investment is less than expected especially for equipment (6.6 percent compared to 6.7 percent) and intellectual property products (10.7 percent compared to 13.1 percent) and continues to decline for structures (-3.9 percent compared to -4.2 percent) and housing investment (-4.7 percent compared to -3.5 percent).

So far, contributions from personal inventory are 0.11 percentage points, below 0.13 percentage points in previous estimates.

On the other side, trade barriers with China were small than expected because exports increased and imports rose at a low pace. Exports increased 1.8 percent (1.6 percent in previous estimates). While, imports were cut to 2 percent from 2.7 percent in the previous estimate. As a result, the impact of the trade was -0.08 percent, compared with -0.22 percent in the previous estimate.

Government spending and investment fell 0.4 percent, compared with a 0.4 percent increase in previous estimates. The shutdown of the federal government which began on December 22 is likely to contribute to the decline.

Comment on the scene, Vice Chair of Federal Reserves Richard H. Clarida acknowledged that indeed the US economy was in a big shock due to negative demand originating from abroad, such as a foreign recession. According to him, there are three things that trigger the decline in US economic growth today.

First, this shock affects the United States through direct trade links, lowering demand for US exports and, thus, lowering US GDP.

Second, the foreign recession leads to lower interest rates abroad and, other things being equal, raises the value of the dollar, which in turn lowers US exports and boosts US imports. The dollar appreciation also puts downward pressure on US import prices and, thereby, inflation. The extent to which foreign worries lead to safe-haven flows may add to the dollar’s strength.

Finally, there is contagion to US financial markets. The traditional determinants of exchange rates – that is, differentials in expected rates of return – apply to the US as to other countries. But the US economy is different because of the special role of US government bonds as global safe assets.

“As a consequence, an adverse foreign shock that damped the demand for risky assets would be expected to trigger safe-haven flows that boost the dollar, weighing on the US economy. The spillover of risk aversion to US markets might well also push down equity prices and widen corporate credit spreads, adding to the contractionary pressures,” he said at the BDF Symposium and 34th SUERF Colloquium in Paris, France, on Thursday (03/28).

He considered, US and other financial markets were adjusted to a number of significant global risks, including Brexit, a sharp decline in the outlook for global growth, and trade tensions.

The Fed has committed to a dual mandate to achieve maximum work and price stability, but US policymakers can hardly ignore this risk.

“In addition, in our policy statements, as well as in other communications, we have indicated that, in the face of these risks and with muted inflationary pressures, we can be patient and dependent on data when we assess in future meetings what adjustments have taken place. At the level of our policy it may be necessary to maintain growth, employment, and price stability in the US economy,” he said.

Written by Daniel Deha, Email: daniel@theinsiderstories.com