The reading fell short of expectations of economists surveyed by Bloomberg News, who had forecast 2.2 percent annualized growth in the fourth quarter, roughly in line with average growth seen since the beginning of 2010.
Economists blamed slow growth last year primarily on lackluster business investment, as historically low oil prices during most of 2016 brought expansion in the U.S. energy sector to a halt.
However, data showed that business investment turned up in the fourth quarter as global oil prices began to rise – a sign that the U.S. economy could be turning a corner into 2017.
“The GDP data show that the economy’s growth peaked about the middle of 2014, just when commodity prices peaked, and the big downturn in commodity prices led to a slowdown in activity that affected the next year and a half,” said Kevin Logan, chief U.S. economist at HSBC. “Now we’re on the other side of that.”
Businesses appeared to be stocking up on inventories and investing more at the end of the year. That’s one critical area that has lagged behind in the recent economic expansion, said Kathy Bostjancic, the director of U.S. macro investor services at Oxford Economics.
Businesses have been reluctant to spend, given the lack of clarity about what the new presidential administration might do in terms of economic policy, trade, government spending, immigration, corporate reforms and regulation, said Bostjancic. “That is a critical issue, the lack of certainty, so businesses have really been holding back.”
The strength of the dollar also weighed on the economy, Logan said, making imports more attractive and expanding the trade deficit. Consumer spending, which accounts for more than two-thirds of the U.S. economy, was a relative bright spot, especially on automobiles, appliances and electronics.
The dollar weakened and Treasury yields fell Friday morning. Stock markets, which have hovered near all-time highs in recent weeks, were little changed at the opening bell.
The data was the first reading from the Commerce Department and will be revised twice more in coming months. The economy surged to 3.5 percent growth in the third quarter, the best growth rate in two years, driven partly by an unusually large volume of soybean exports.
Still, growth of nearly 2 percent puts the U.S. ahead of many sluggish economies around the world, from Europe to Asia. “I know most people say ‘Oh, 2 percent isn’t that great,’ but in the current world it is. Many countries would be envious,” said Beata Caranci, chief economist at TD Economics.
While economists look fairly positively on the progress that the U.S. has made since the recession, current GDP growth is far below the 4 percent target President Donald Trump has said he is aiming for. To reach that ambitious target, the U.S. will have to overcome significant challenges, like a working age population that is shrinking as Baby Boomers retire, and sluggish productivity growth, economists said.
“It’s hard to orchestrate 4 percent on a long-term sustained basis,” said Caranci.
Trump has promised to slash taxes and regulations on businesses, measures that may encourage businesses to spend further and boost economic growth in coming years. However, he has also adopted a combative posture on trade relations, proposing tariffs that could disrupt trade relations and global supply chains. On Thursday, Press Secretary Sean Spicer floated a potential 20 percent tax on imports from Mexico, America’s third-largest trading partner in goods, to fund a massive border wall.
While GDP growth has been somewhat tepid, data from the jobs market gives a picture of a stronger economy. In December, the U.S. saw its 75th straight month of job growth, while wages rose 2.9 percent from the year before, a sign of diminishing slack in the labor market.
Jan Hatzius, chief economist at Goldman Sachs said it is clear the U.S. is “at least in the neighborhood” of full employment, the point at which most people in the U.S. who want a job will have one. “If we get continually strong growth, and especially if that is boosted further by tax cuts and spending increases, then the Fed is going to want to lean against that,” he said.
Analysts say the U.S. Federal Reserve is unlikely to raise rates at its meeting next week, especially given relatively easy price increases. An index of core inflation released with the GDP figures showed prices rising just 1.3 percent in the fourth quarter.
Markets are looking for at least two rate hikes in 2017 to offset the risk of inflation in a strengthening economy. Those moves may depend heavily on whether the Trump administration rolls out policies that could further stoke inflation, including tax cuts and infrastructure spending.
At a news conference in December, Fed chair Janet Yellen implied that the central bank would be looking closely to changes in taxes and government spending as it charts its course for the coming years. “We're operating under a cloud of uncertainty at the moment, and we have to wait and see what changes occur and factor those into our decision-making as we gain more clarity,” Yellen said.