Weaker Than Expected GDP: Mixed Bag or Worse?

Fourth Quarter real GDP came in at 2.6%. Nowcast estimated 3.9%, GDPNow 3.4%. Let's dive into the report.

The BEA estimates the Advance Estimate of Real GDP for the fourth quarter at 2.6%. The figure is well below estimates by Nowcast, GDPNow, and Econoday (3.9%, 3.4%, 2.9%) respectively.

Percentage Point Contributions

  • Personal Consumption Expenditures (PCE): +2.58
  • Fixed Investment : +1.27
  • Change in Private Inventories (CIPI): -0.67
  • Net Exports: -1.13
  • Government: +0.50

Within Fixed Investment

  • Nonresidential: +0.84
  • Residential: +0.42

For all the talk about housing, the reported number had to be worse than expected.

Within Net Exports

  • Exports: +0.82
  • Imports: -1.96%

Econoday Crows Over "Standout" Report

Econoday was crowing over the results.

The 2.6 percent headline rate doesn't do justice to fourth-quarter GDP where consumer spending rose a very strong 3.8 percent that reflects a 14.2 percent burst in durable spending. Residential investment, which is another consumer-related component, rose at a very impressive 11.6 percent annualized rate. Turning to business spending, nonresidential fixed investment rose at a 6.8 percent rate which is the fourth straight mid-single digit result. Government purchases, at a 3.0 percent rate, also added to GDP in the quarter.

What pulled down fourth-quarter GDP were net exports, at an annualized deficit of $652.6 billion, and inventories which rose at a slower rate than the third quarter. Looking at final sales to domestic buyers, which excludes inventories and exports, GDP comes in at a robust 4.3 percent.

Prices also showed life in the quarter, with the index at 2.4 percent vs the third quarter's 2.1 percent. This is a standout report led by the consumer that shows the economy accelerated into year-end 2017 with strong momentum going into 2018.

Standout Nonsense

The report is nothing to crow about. It's a mixed bag. Changes in inventory will even out over time so one can argue the inventory drawdown is a plus looking ahead.

Government spending is nothing to crow about. Had government spending been flat, GDP would have been 2.1%. This is quite ugly.

Despite a blockbuster 4th quarter, residential investment only added 0.42 percentage points. With the slowdown in December, it's difficult to know what if any momentum there is headed into the first quarter of 2018.

Net exports subtracted 1.13 percentage points. Trump will howl over this decidedly bad number. Expect more protectionism and tariffs. That's always a bad thing.

Econoday reports "final sales to domestic buyers" at a robust 4.3%. OK, but the BEA's bottom-line estimate ignoring inventory changes is "final sales of domestic product". That number is 3.2%

Final Thoughts

Despite all the crowing about consumer spending, recall that it is occurring only because of an unsustainable drawdown in savings.

As noted previously, 24% of millennials are still paying down credit card bills from Christmas of 2016!

Start with final sales of domestic product, factor out government spending, factor in the declining savings rate, then factor in the hurricane impact, and the absolute best one can realistically label this report is "mixed".

This report was not a "standout". Rather, Econoday's assessment was "standout nonsense".

Mike "Mish" Shedlock

Comments
No. 1-13
Wrldtrst
Wrldtrst

When... god doesn't even know. How badly. Let me answer this with an anecdotal opinion I have held now for a long time. In markets, extremes tend to occur only after other extremes. Throw that in with the generalized axiom of markets go up like an escalator and down like an elevator, realizing that at the moment we are heading up like an elevator and you are getting ready for an epic blowoff. (but from where??? 2850, 3000, 3200, 3600, ????) . If with a gun to my head I had to guess from where it falls, I'd say pull the trigger, I just have no frickin idea. Now with a gun to my head, if I had to answer how it happens, I'd say a really big move down - followed by a fairly quick move back up to near the highs, and then say goodnight Gracie back down to 2100 or even 1600 (the latter of those two numbers has been on my radar for years). But for now, I'll stick to what I've been saying all along... it wants to go up. BTW Realist, do you want to field a question for me? Just asking because I know you will give me an honest answer without looking up the answer. (Although amazingly, when I looked up the answer on Google, I was surprised how wishy-washy it was answered, and that the Fed paper I found on it missed the best proof and shouldn't have needed to have been written in the first place.

Realist
Realist

I agree Shamrock. Pretty much the same slow growth continues. I also expect the slow growth to continue for several years, barring a black swan event. All the combined stimulus trying to get the economy growing faster is primarily ending up in higher stock prices. I am less certain about how much longer the market can continue to rise. I also agree with wrldtrust regarding the impact from the flow of funds on market prices. I just don’t know when this will turn and how badly. For the remainder of this year, it would not surprise me to see several 5% corrections, followed by a flood of money buying the dips.

Ambrose_Bierce
Ambrose_Bierce

Not good at all, the stock market wealth effect should be good for something here. The collateral economic pickup in GOLD and GDP is a given, they are riding the coattails of speculation, but it seems very short coattails. Meanwhile rising rates hurt energy prices, (okay the dollar is down, which leaves the consumer to foot the difference) energy exports is about all we have, so kiss it all goodbye.

Mike Mish Shedlock
Mike Mish Shedlock

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