Fourth-quarter GDP a mixed bag
Gross domestic product (GDP) grew at a slightly stronger-than-expected annualized pace of 2.1% in the fourth quarter of 2019, matching the third quarter. This was a tick above the 2% estimate carried by both Bloomberg and the Blue Chip consensus, although it was lighter than our 2.3% forecast here at Federated, an estimate that we shared with the Atlanta Fed’s widely followed GDPNow model. That brings full-year 2019 to an in-line 2.3%, down from a more robust 2.9% in 2018. GDP in the U.S. now approximates $21.7 trillion in current dollars.
Personal consumption was softer than expected in the fourth quarter, despite a stronger-than-expected 4.1% year-over-year (y/y) gain in Christmas retail sales, which could potentially result in a positive GDP revision at the end of February. In addition, housing hasn’t been this strong in two years, net trade improved due to a sharp decline in imports and government spending was solidly positive.
On the negative side of the ledger, the pace of inventory accumulation slowed sharply and corporate capital spending declined for the third consecutive quarter, due to the GM strike, production problems at Boeing, the overhang from the ongoing China trade dispute and the decline in oil drilling activity.
So while the now-completed fourth quarter was relatively solid, we’re bracing for a potentially sloppy first quarter, which will likely be buffeted by Boeing’s decision to temporarily cease production of its grounded 737 MAX jet. In addition, the Wuhan coronavirus continues to spread rapidly, with 218 people now dead and nearly 10,000 confirmed cases globally.
As the equity market begins to discount these global risks to first-quarter GDP, the S&P 500 has declined nearly 4% over the past fortnight, or roughly half the 5-8% correction we had envisioned. Our best guess is that we’ll be looking at Boeing’s problems and the coronavirus in the rear-view mirror by midyear, which suggests stronger economic and corporate profit growth and recovering share prices in coming months.
Here are the key details regarding the fourth-quarter GDP flash report:
Consumer spending softens Personal consumption expenditures, which account for 70% of GDP, rose a weaker-than-expected 1.8% in the fourth quarter, compared with consensus expectations for a 2.0% increase. This was the slowest pace since last year’s first-quarter gain of only 1.1%, versus a 3.2% gain in the third quarter and a stronger 4.6% increase in the second quarter. All told, consumer spending added 1.2 percentage points to overall fourth-quarter GDP growth in the initial estimate, versus 2.12 in the third quarter. Importantly, retail sales for Christmas rose by a stronger-than-expected 4.1% y/y, while fourth-quarter personal spending increased at an annualized pace of 3.4% y/y. So we may see consumer spending revised higher next month.
Housing remains strong Residential construction, which accounts for only 3.8% of the economy, rose for the second consecutive quarter at its strongest pace in two years, after six straight declines, due to lower mortgage rates. Housing rose 5.8% in the fourth quarter, which added 0.21 percentage points to GDP growth, versus a 4.6% third-quarter gain. With winter now upon us, however, we could see housing pause until spring.
Government spending positive Total government spending, which accounts for about 17.6% of total GDP, rose 2.7% in the fourth quarter, compared with a 1.7% increase in the third quarter. This added 0.47 percentage points to fourth-quarter GDP. Federal government spending rose 3.6% in the fourth quarter (paced by a 4.9% gain in defense spending), while state and local spending rose 2.2%.
Net trade improves sharply The monthly trade deficit through November narrowed by about 30% over the past year, largely due to the ongoing trade and tariff war with China. So during the fourth quarter, the sharp improvement in net trade added 1.48 percentage points to GDP growth, versus declines of 0.14 from GDP growth in the third quarter and 0.68 in the second quarter. Exports (11.5% of the U.S. economy) grew 1.4% in the fourth quarter, versus 1.0% in the third quarter, adding 0.17 percentage points to GDP growth. Imports (14.1% of the economy) plunged by 8.7% in the fourth quarter because of the tariff increases, compared with a 1.8% gain in the third quarter, which added 1.32 points to GDP. The recent signing of the Phase One U.S.-China trade deal on Jan. 15 should boost U.S. exports to China.
Pace of inventory growth plummets Inventories rose by only $6.5 billion in the fourth quarter, related to the now-settled GM auto workers strike, down sharply from $69.4 billion in the third quarter, which reduced GDP by 1.09 percentage points. With an unsustainable first-quarter inventory build of $116 billion, which had added a robust 0.53 percentage points to growth, we have been expecting some inventory payback. But the good news is that when Boeing’s production issues are eventually resolved and the coronavirus is corralled, an inventory rebuild later this year will boost GDP growth.
Business fixed investment declines again Nonresidential real business fixed investment, which accounts for about 13.2% of the economy, declined for the third consecutive quarter for the first time since 2009. The fourth-quarter drop of 1.5% subtracted 0.20 percentage points from GDP. This compares with a 2.3% decline in the third quarter, as uncertainty surrounding the ongoing China trade and tariff war continued to weigh on corporate CEO confidence and their capex spending decisions. Looking at the three key subcomponents, nonresidential structures plunged for the third consecutive quarter and for the fifth time in the past six quarters, falling 10.1% in the fourth quarter, which subtracted 0.30 points from GDP growth versus a 9.9% third-quarter decline. Business equipment spending declined for the second consecutive quarter and for the third time in the past four quarters, falling 2.9% in the fourth quarter, which subtracted 0.17 points from GDP growth, compared with a 3.8% third-quarter decline. Intellectual property investment remains the lone capex star, rising 5.9% in the fourth quarter and adding 0.27 percentage points to GDP growth, versus a 4.7% gain in the third quarter.
Final sales softer Private domestic final sales, which exclude volatile net trade, inventory building and government spending, rose by only 1.4% in the fourth quarter versus 2.3% in the third quarter and 3.3% in the second quarter. This metric is a better indication of underlying fundamental demand.