Rapid Reaction: Q4 2016 GDP

• U.S. real Gross Domestic Product rose 1.9 percent in Q4 2016, according to advance estimates from the U.S. Bureau of Economic Analysis, down from 3.5 percent growth recorded in Q3.
• Slower Q4 2016 GDP growth was driven lower in part by a downturn in federal spending and weaker exports that was only partially offset by an uptick in housing investment.
• Residential investment turned in its strongest contribution to GDP in a year, boosting GDP growth by 0.37 percentage points, compared to a 0.16 point drag in Q3, a 0.31 point drag in Q2 and a 0.29 point boost in Q1.

The strength of the housing market helped buoy the U.S. economy at the end of 2016, making its biggest contribution to GDP in a year and helping to at least partially offset reduced government spending and weaker exports that caused the overall pace of economic growth to slow. Residential investment went from a drag on the economy in prior quarters to a big boost in Q4, largely because of strong new home sales in October and November. But as we saw earlier this week, new home sales did not continue this momentum in December, and it will be important to see how this data changes as more accurate data is incorporated and further estimates of growth are published. Going forward, it's unlikely that housing will be much of a drag on growth, but Q4 data showed a slowdown in wage and salary growth that could impact housing affordability, particularly as interest rates keep rising. While there were certainly bright spots in the report, economic growth was slower than expected to close out 2016.