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3/19/2020

Acting Assistant Secretary Diana Furchtgott-Roth Economy Statement for the Treasury Borrowing Advisory Committee of the Securities I…

Acting Assistant Secretary Diana Furchtgott-Roth Economy
Statement for the Treasury Borrowing Advisory Committee of
the Securities Industry and Financial Markets Association
January 31, 2019

Over the first three quarters of 2018, the U.S. economy grew at an annualized rate of 3.2 percent,
the fastest pace for the first three quarters of a year since 2005. Initial data for the fourth quarter
indicate the economy continued to perform well, although slowing global growth and the
housing sector could present headwinds. Private forecasters now estimate that real GDP growth
slowed to around 2.7 percent in the fourth quarter, and will slow further to 2.2 percent in the
first quarter of 2019.
Strong private consumption, robust business investment, and a solid build in private inventory
were the main drivers of healthy economic performance experienced in the first three quarters
of 2018, followed by a positive contribution from government spending. For the first time since
2010, residential investment declined in the first three quarters of the year. Real net exports
also subtracted from growth, though the latter partly reflected strong domestic demand for
imports in the U.S., a reflection of higher growth in the U.S. relative to trading partners.
Labor markets remain very tight, with the number of job openings remaining above the number
of job seekers for seven of the past eight months. The pace of job creation accelerated in 2018,
exceeding monthly averages seen during the previous two years, and in the latter half of 2018,
growth of nominal and real wages accelerated on a more sustained basis. A er falling to a 50year low of 3.7 percent during the fall of 2018, the unemployment rate rose to 3.9 percent in
December, the result of an increase in labor force participation. Manufacturing activity slowed
and business sentiment pulled back a bit during the fourth quarter, each from very high levels,
however.

GDP GROWTH
Over the first three quarters of 2018, real GDP grew at an annualized rate of 3.2 percent. Private
domestic final purchases – the sum of personal consumption, business fixed investment, and
residential investment – grew at an annualized rate of 2.8 percent over that same period. On a
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3/19/2020

Acting Assistant Secretary Diana Furchtgott-Roth Economy Statement for the Treasury Borrowing Advisory Committee of the Securities I…

quarterly basis, private domestic final demand grew at an annual rate of 1.0 percent in the third
quarter.
Growth in real personal consumption expenditures continued at a solid pace of 3.5 percent at an
annual rate in the third quarter, building on the second quarter’s strong 3.8 percent advance.
Outlays on consumer services drove consumption, rising 3.7 percent at an annual rate and
accounting for almost two-thirds of consumers’ contribution to GDP growth. Spending on
durables increased 3.7 percent in Q3 while nondurables expenditures were up 4.6 percent in the
third quarter. On balance, real personal consumption expenditures added 2.4 percentage
points to growth in the third quarter.
Business fixed investment increased 2.5 percent at an annual rate in the third quarter a er
increasing 8.7 percent in the second quarter, and added 0.4 percentage point to overall growth.
Since the end of 2017, real private nonresidential fixed investment has grown 7.5 percent at an
annual rate, indicating a healthy environment for business investment that has been aided by
deregulation and the Tax Cuts and Jobs Act. Fixed investment in intellectual property products
and equipment increased in the third quarter, rising 5.6 percent and 3.4 percent, respectively.
Intellectual property investment has grown 10.0 percent since the end of 2017, the strongest
pace through the third quarter since 1999, while equipment investment has risen 5.5 percent
through the third quarter. Although investment in structures declined 3.4 percent in the third
quarter a er growing at double-digit paces in each of the previous two quarters, the level of
investment in structures remains 8.0 percent above its level at the end of 2017. Meanwhile, the
cycle of inventory accumulation turned strongly positive in the third quarter, adding 2.3
percentage points to real GDP growth.
Residential investment retrenched for the third consecutive quarter, declining 3.5 percent at an
annual rate and down 2.8 percent since the end of 2017. Signs of slowing in the housing sector
persist against a backdrop of low inventories and rising mortgage rates. Existing home sales,
which account for 90 percent of all home sales, declined in 8 of the past 12 months, including a
6.4 percent drop in December, and were down 10.3 percent since the end of 2017. Similarly,
new home sales have fallen six times in 2018 and as of October were down 14.5 percent since
the end of 2017. Meanwhile, total housing starts increased 3.2 percent in November and were
up 3.8 percent since the end of 2017. However, the gain solely reflected growth in the volatile
multi-family sector. Single-family units decreased 4.6 percent in November and were down
2.7 percent since December 2017. The story is similar for building permits. Total building
permits rose 5.0 percent in November and were 0.6 percent higher since December 2017, but
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Acting Assistant Secretary Diana Furchtgott-Roth Economy Statement for the Treasury Borrowing Advisory Committee of the Securities I…

permits for single-family homes have fallen 3.3 percent since the end of 2017. Confidence for
builders of single-family homes so ened toward the end of 2018: the NAHB’s home builder
confidence index was down 18 points in December over the year. However, the index picked up
2 points to 58 in January 2019, indicating a positive outlook for the year, even as demand has
moderated. House price appreciation remains relatively strong, exceeding core inflation and
income measures, although the pace has slowed relative to a year ago, likely due to notably
higher mortgage rates in recent months.
Total government spending rose 2.6 percent at an annual rate in the third quarter, accelerating
from a 2.5 percent pace in the previous quarter. A er making an essentially neutral contribution
to growth in most of 2016 and 2017, government spending has added 0.4 percentage points on
average to GDP growth in each of the past three quarters. Federal outlays grew 3.5 percent in
the third quarter a er a 3.6 percent rise in the previous quarter, while state and local
government spending growth stepped up to a 2.0 percent rate in the third quarter – the fastest
pace in more than two years.
The U.S. trade deficit widened in the third quarter, as imports grew at an annual rate of
9.3 percent and export growth declined 4.9 percent. As a result, net exports subtracted
2.0 percentage points from growth in the third quarter, a er adding 1.2 percentage points to
growth in the second quarter.

LABOR MARKETS AND WAGES
The December labor market report included calendar year-end revisions using updated
seasonal adjustment factors to data going back to January 2014. Revisions to unemployment
rates from January through November 2018 resulted in readings that were on net 0.1
percentage point lower. In December, the unemployment rate rose to 3.9 percent from the 50year low of 3.7 percent reached in September and again in November. The increase was due
entirely to a rise in the labor force participation rate, which reached 63.1 percent, its highest
level since September 2013. The most comprehensive measure of labor market slack, which
includes those marginally attached to the labor force and those working part-time for economic
reasons, declined to a 17-year low of 7.4 percent in August 2018, but since then, has edged up
slightly, and stood at 7.6 percent in December 2018, still 1.7 percentage points below the prerecession average of 9.1 percent. During 2018, monthly job growth averaged 220,000, well
above the 182,000 monthly average for 2017 as well as the 195,000 monthly average in 2016.

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Acting Assistant Secretary Diana Furchtgott-Roth Economy Statement for the Treasury Borrowing Advisory Committee of the Securities I…

Payroll job creation surged to 312,000 in December, the second-highest gain in 2018. The
employment report for January will be released this Friday, February 1.
The pace of nominal wage growth resumed an accelerating trend towards the end of 2018 a er
leveling o for several months. Slower inflation combined with faster nominal wage growth
resulted in notably stronger gains in real wages as well. Nominal average hourly earnings for
private-sector production and nonsupervisory employees rose 3.3 percent over the year ending
in December, the fastest pace since April 2009. Real average hourly earnings advanced 1.5
percent over the same period, the fastest rate since August 2016. And, for the first time since
early 2009, the 12-month growth rate of wages and salaries for all private industry workers has
held above 3 percent for three consecutive months through December. Using the Personal
Consumption Expenditures (PCE) price index, which reflects substitution of lower-priced goods,
real average hourly earnings likely grew by at least 1.6 percent over the past year through
December. Another measure of wage and salary growth, the Employment Cost Index, showed
that private wages and salaries grew by 2.9 percent in the third quarter, the fastest pace since
March 2008. Data for the Employment Cost Index for the fourth quarter will be released this
Thursday, January 31.

PRICES
Declining energy prices over the past several months have contributed to a slowing in headline
inflation by several measures, while core inflation, which excludes the volatile food and energy
components, has stabilized. During 2018, the increase in the consumer price index (CPI) for all
items peaked at 2.9 percent over the 12 months through June and July, but slowed by a full
percentage point to 1.9 percent over the year through December, a rate 0.2 percentage point
below the year-earlier pace. Notably, energy price inflation slowed markedly from 12-month
rates of 12 percent or more last June and July to a decline of 0.3 percent over the year through
December 2018. Food price inflation was stable through most of 2018 but accelerated to 1.6
percent over the 12 months through December, albeit equal to the year-earlier pace. Excluding
food and energy, the CPI increased 2.2 percent over the year through December 2018, above the
1.8 percent rate through December 2017.
Twelve-month readings of the headline PCE price index held at or above 2.0 percent through
most of 2018, but slowed to 1.8 percent over the year through December 2018, matching the
year-earlier rate. Core PCE price inflation also picked up during most of 2018, and in December

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Acting Assistant Secretary Diana Furchtgott-Roth Economy Statement for the Treasury Borrowing Advisory Committee of the Securities I…

its yearly pace stood at 1.9 percent, accelerating from the 1.6 percent pace observed a year
earlier.

CONCLUSION
The economy performed strongly during the first three quarters of 2018, benefitting from tax
reform, deregulation, and other measures to boost investment, incomes, and labor force
participation. Starting in Q2 2017, wage growth—a formerly missing piece of the current
economic recovery—began to show both nominal and real growth. Nonetheless, we need to be
aware that the slowdown in global growth has the potential to a ect GDP. Private sector
forecasts suggest a slowing of GDP growth in the fourth quarter and a further slowing in the first
quarter of 2019. Recent sharp declines in manufacturing growth as well as business and
consumer sentiment have nonetheless been from a very high level. For example, the Institute of
Supply Manufacturers index reached a 14-year high of 60.8 in August, and has declined 6.5
points since, which still indicates expansion. In October 2018, the Conference Board Consumer
Confidence index hit an 18-year high of 137.9, but over the next two months, fell by 9.8 points in
total, reaching 128.1 in December, a high level. Overall, private domestic demand has remained
strong, labor markets have tightened further, and labor force participation continues to trend
higher.
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