Despite tepid growth in fourth-quarter GDP, consumer spending recorded an encouraging increase, according to the “first estimate” of the Bureau of Economic Analysis (BEA). A low level of borrowing costs, a strong labor market and stable wage growth had a positive impact on household expenditure. Moreover, rising consumer sentiment and optimism over Trump’s tax cut policies are expected to keep this growth pace alive this year in consumer spending.

Consumer spending continued to increase at a healthy pace in the last month of 2016. Moreover, an index of consumer sentiment hit a record level in December. The auto and utilities sector, which have attracted a major part of consumer spending, is poised to benefit from this favorable backdrop.

Robust Consumer Spending in Q4

The advance estimate of fourth quarter GDP by BEA shows that the U.S. economy expanded at an annualized rate of 1.9%, slightly below the consensus estimate of 2.2%. However, an encouraging increase in consumer expenditure emerged as one of the few bright spots in the GDP report.

According to the report, consumer spending in the fourth quarter advanced 0.5% in December, registering its best increase since September 2016. Moreover, overall personal spending rose 3.8% in 2016, better than an increase of 3.5% in 2015. Consumer expenditure, the largest contributor to U.S. GDP, accounted for 1.70 percentage points of GDP growth.

The purchase of big ticket items like automobiles rose 1.4% in December giving a boost to the major portion of consumer spending. Also, spending in utilities-related services spiked 0.4% on the back of a cold winter.

Consumer spending is expected to increase further this year following the expectation that Trump may reduce corporate income-tax rate to 15% from 35% as well as cut individual rates. Additionally, consumer sentiment is showing positive signs for markets.

Consumer Sentiment Hits 13-Year High

The University of Michigan Consumer Sentiment index increased from 98.2 in November to 98.5 for the month of December. This reading exceeded all expectations and is the highest observed since 2004. According to the report, 44% of those surveyed expect the economy to improve over 2017. Additionally, 33% of respondents think that the unemployment rate will continue to decline.