Modest Q4 GDP Growth & Improved Homeownership Rate


2.1% Q4 GDP Growth

Year over year GDP growth was 2.3% and quarter over growth was 2.1% which exactly met estimates and was at the high end of my expected range (1.7% to 2.1%). St. Louis Fed Nowcast was exactly correct even though its final reading doesn’t come out until Friday. This seems to have been an easy quarter to forecast. 

There weren’t many surprises in this report. Full year GDP growth was 2.3% in 2019 which was down from 2.9% as the boost from the tax cut waned. There has been a cyclical slowdown this year as ECRI predicted. That slowdown and the Fed’s hawkishness are why stocks fell in Q4 2018.

Real consumer spending growth fell from 3.2% to 1.8% which missed estimates by a tenth. Unlike the last 2 quarters which had over 70% of growth driven by consumption, in Q4 less than 40% of growth was driven by consumption. It added 1.2 points to GDP growth (spending on services helped 0.9%). Full year PCE was up 2.6%. In Q4 real disposable income growth was 1.5% which fell from 2.9% growth in Q3. 

Full year income growth was 3% which fell from 4%. The savings rate in Q4 was 7.7%. GDP price index was up 1.4% which fell from 1.8% and missed estimates for 2%. For the quarter, headline PCE inflation was up 0.1% to 1.5% and core PCE inflation fell 0.1% to 1.6%.

Imports & Inventories Nearly Cancel Each Other Out

As you can see from the chart below, more than 70% of GDP growth came from the temporary decline in imports. I’ve been discussing for the past few weeks that this would be the case. There was a 1.5 point contribution to GDP growth from the 8.7% decline in imports and the 1.4% increase in exports. 

Decline in imports was partially because of the trade war with China. Goods imports fell 11.6% which was the sharpest decline since 2009. Final sales to private domestic purchasers growth was 1.4% which was the weakest growth in the past 4 years (Trump’s presidency). That was down from 2.3% in Q3.

As the chart also shows, growth was hurt by the depletion of inventories. Decline in imports went hand in hand with the decline in inventory investment. So the two factors nearly canceled each other out. And the decline in imports alone helped GDP growth by 1.3% and the drawdown of inventories hurt growth by 1.1%. A GM strike caused a temporary rundown in motor vehicle inventories. Inventories rose at a quarterly pace of just $6.5 billion which fell from $69.4 billion and was the lowest gain since Q2 2018.

Residential investment growth was 5.8% (up from 4.6% and the strongest growth in 2 years). But that increased growth rate only pulled yearly growth to 1.5%. This is the 2nd straight quarter residential investment helped GDP growth, but the impact was modest as it usually is. Largest impact in the past 6 years was only 0.5%. The impact in Q4 was close to 0.2%.

Residential investment’s GDP impact was counteracted by non-residential fixed investment. As you can see from the chart below, it was negative for the 3rd straight quarter. I’m expecting a rebound in Q1 because of the improvements in the regional Fed capex indexes. 

Gross private domestic investment fell 6.1% as non-residential fixed investment fell 1.5% (better than the 2.3% decline in Q3). Outlays on structures fell 10.1% and spending on equipment fell 2.9%.

Spending on durable goods was up 1.2% and spending on non-durable goods rose 0.8% which was the weakest growth rate since Q1 2018. This isn’t just a manufacturing recession; it’s a business investment recession. That being said, it’s near its end, so don’t panic. Boeing’s 737 Max delay weighed on business investment. That impact will likely subside this spring or summer. It also increased inventories.

Even though the weakness from inventories nearly canceled out the positive impact from the decline in imports, ultimately this report was weaker than the headline reading because government spending growth was strong. Government consumption expenditures and gross investment was up 2.7% as it was helped by a 4.9% increase in defense spending. Local and state spending growth was 2.2%. Overall, government spending helped GDP growth by about 0.5%.

Usually, this type of government spending growth occurs at the end of recession when the unemployment rate is high and the government is trying to stimulate growth. But this time it’s about Trump’s spending on defense. An increase in spending and the tax cuts have made for unusually high deficits. Even though the economy is near full employment (generating a lot of income & corporate taxes). The budget deficit in 2019 was $1.02 trillion which increased 17.1% from 2018 (which had 28.2% growth itself).

Jobless Claims Fall

Jobless claims in the week of January 25th were 216,000 which was 1,000 above the consensus and down 7,000 from last week. The prior report was revised higher by 12,000 from 211,000. As you can see from the chart below, that’s one of the largest revisions in the past 10 years. 

It doesn’t necessarily imply weakness in the labor market. It’s just worth mentioning. This report almost never has large revisions. As expected, continuing claims fell again as the spike related to the end of the year has been relinquished. They fell 44,000 to 1.703 million. That’s a decline of 101,000 in 3 weeks. It was the lowest total since November 30th.


This GDP report showed relatively normal headline growth, but under the surface there was some weakness. Consumption growth slowed and fixed residential investment fell. Government spending made GDP growth look better than it was. 

Good news is residential fixed investment had a relatively strong impact. Imports fell and inventory investment was weak. Last week’s jobless claims report was revised higher. It was an unusually high revision for this report. The good news is continuing claims fell in that week. A spike that occurred at the end of 2019 has been reversed. 

The post Modest Q4 GDP Growth & Improved Homeownership Rate appeared first on Theo Trade.

Source: First Rebuttal

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