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Weaker Than Expected GDP: Mixed Bag or Worse?

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".

By Mike "Mish" Shedlock

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