U.S. GDP Grew 2.3% in 2017, But the Real Story is Productivity

The U.S. Commerce Department released new gross domestic product (GDP) estimates for Q4 and year-end 2017 on January 26, and the numbers were close to but slightly lower than what experts predicted: the U.S. GDP grew 2.3% in 2017 and 2.6% in Q4 2017. Hours after the numbers were released, Business Forward hosted a webinar featuring Ed Keon, Managing Director of QMA, a PGIM Company. The real story from these numbers, Keon said, will come down to productivity.

Going into Friday, experts predicted the numbers would be slightly higher than they were. Overall slower growth is primarily the result of two factors: businesses drawing down their inventories, and an increase in imports. As Keon explained, businesses drawing down their inventories in Q4 is not a bad thing. “If you draw down inventories one quarter, you’re going to add to them the next,” Keon said. “That’s growth deferred, not growth denied.”

Likewise, the increase in imports can partially be explained by strong consumer spending, which grew an estimated 3.8% in Q4 2017, as well as imports of building materials after 2017’s destructive hurricane season. Overall, growth is accelerating, Keon said, and we can expect to see better growth as we enter 2018.

The most important thing for the U.S. economy, both in 2018 and in the future, Keon said, is what happens to productivity growth. To reach the current economic growth target of 3% or more and to have low inflation while wages rise, the country needs stronger productivity growth. Productivity growth has been fairly weak for the past few years, and economists can’t quite tell us why—they don’t understand why productivity growth goes through the cycles it does—but economists do know increased investment in productive equipment tends to increase productivity. In Q4 2017, we saw business investment grow by 6.8%, which bodes very well for future productive capacity.

Moreover, in the past year we have seen positive growth in equipment spending, which has been trending up in 2017, reaching a high of 11.4% in Q4. “The fact that this is growing is great news,” Keon said, “both in the short-run and in the long-run.” We can also expect that the tax reform law will drive further investment in equipment and contribute to future productivity growth.

Listen to the full webinar with Ed Keon and view the slides below. To sign up for alerts to new programming from Business Forward, including invitations to all our quarterly economic indicators webinars, click here.