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The US economy expanded at an annualized rate of 2.6% during the fourth quarter, above expectations. According to analysts from Wells Fargo, the stronger-than-expected GDP outturn should alleviate some concerns that the economy is in serious trouble. They forecast looks for further deceleration in the first quarter (real GDP to grow roughly 2% in Q1) and a modest rebound starting in Q2.  

Key Quotes:  

“The outturn was stronger than the 2.2% rate that the market consensus had expected, but it still represents a stepdown from the very strong growth rates that were registered earlier in the year.”

“The breakdown of the GDP data into its underlying demand components showed that the deceleration was led by real personal consumption expenditures (PCE), which grew 2.8% in Q4. Real PCE was boosted, at least in part, earlier in the year from the personal tax cuts that were part of the Tax Cuts and Jobs Act (TCJA) of December 2017. Although the real income-boosting effects of the tax cuts will fade over time, income growth should remain solid due to the robust labor market.”

“The effects of the government shutdown,  which started in December, also showed up in the data as non-defense federal government spending tumbled at an annualized rate of 5.6% in Q4. Because the shutdown lasted into January, this component of spending likely will be weak in Q1 as well before rebounding in Q2.”

“Growth is probably not strong enough right now to induce the Fed to resume its tightening cycle. But we look for the FOMC to tap on the brakes again with another 25 bps rate hike later this year (probably sometime in the third quarter).”