Inventory restocking boosts Q4 GDP
The long wait is over.
After three consecutive quarterly declines, inventories rose in the fourth quarter, sparking much stronger-than-expected GDP growth of 6.9%. That compares with weak growth of 2.3% in the third quarter and a solid second quarter of 6.7%. The most recent Bloomberg consensus estimate for the fourth quarter was for 5.5% growth, while the Blue Chip consensus estimate was 5.9%, the Atlanta Fed’s “GDPNow” model was 5, and our estimate here at Federated Hermes was 4.9%.
Inventory rebuilding in the fourth quarter surged $173.5 billion, up from a decline of $66.8 billion in the third quarter. It added 4.9 percentage points to the overall gain, accounting for an outsized 71% of GDP growth. Personal consumption expenditures and business investment in intellectual property also contributed positively. But net trade was a push, and government spending and housing detracted.
Private domestic final sales improve This metric is a much better indication of the economy’s underlying fundamental strength because it excludes inventory building, volatile net trade and government spending. It rose 2.8% in the fourth quarter, double the third’s muted 1.4% gain. But Q4 still was well below powerful gains of 10.1% in the second quarter and 11.8% in the first.
Whither the Fed? The strength and composition of the GDP report does nothing to dissuade the Federal Reserve from completing its tighter monetary policy plans, outlined at yesterday’s policy-setting meeting. We still expect the Fed to complete its bond-buying taper by the end of the first quarter, begin to raise interest rates with at least four quarter-point hikes this year starting in March, and begin to passively shrink its nearly $9 trillion balance sheet by mid-year.
Details on the fourth-quarter 2021 GDP report:
Personal consumption (70% of GDP) rose a slightly weaker-than-expected 3.3% (accounting for 2.05 percentage points of the overall gain) versus consensus expectations for a 3.4% increase. This compares with a tepid 2.5% third quarter gain, but more robust gains of 12.0% in the second quarter and 11.4% in the first quarter. Christmas spending rose a strong 17.1% during the October-through-December period, which contributed significantly to the fourth-quarter gain in personal consumption. But the personal savings rate has plummeted from 26.6% in March 2021 to 6.9% in November, so we’re expecting that December’s weak consumer spending performance (a month-over-month nominal decline of 1.9% and control decline of 3.1%) could spill over into the start of 2022, in part due to the spike in the Covid omicron variant over the past several months.
Inventories surged for the first time in four quarters, rising $173.5 billion on a chained-dollar basis, compared with outright drawdowns of $66.8 billion in the third quarter, $168.5 billion in the second and $88.3 billion in the first. This massive swing added 4.9 points to growth, accounting for an outsized 71% of total growth in the fourth quarter. We have been patiently waiting for inventory restocking to boost GDP. Is this sharp improvement sustainable, given the West Coast port backlog? More than 100 ships and 100,000 containers still sit in the Pacific Ocean waiting to unload in Los Angeles and Long Beach, whose ports account for 40% of U.S. import volume. We may not see any meaningful relief until midyear.
Corporate nonresidential capital spending rose 2% (adding 0.28 percentage points), versus gains of 1.7% in the third quarter, 9.2% in the second and 12.9% in the first. But structures declined for the third consecutive quarter and for the eighth time in the last nine, falling 11.4%. Equipment spending rose a modest 0.8%, on the heels of a 2.3% third-quarter decline. Intellectual property spending was the star for the sixth consecutive quarter, surging 10.6% in the fourth quarter and adding 0.53 points.
Government spending declined for the fourth time in the past six quarters, falling 2.9%, which subtracted 0.51 points, compared with a tepid 0.9% gain in the third quarter. Federal defense spending declined for the fourth consecutive quarter, decreasing 5.7% (subtracting 0.22 points). State and local spending declined 2.2% (costing 0.24 percentage points).
Housing declined for the third consecutive quarter, slipping 0.8% (which subtracted 0.03 points), after larger declines of 7.7% in the third quarter and 11.7% in the second. After spiking to a 15-year high earlier this year, the housing market has slowed. The culprits were the plunge in the inventory of new and existing houses, a rise in prices and interest rates and a sharp increase in commodity and labor costs.
Net trade had no impact on GDP. Exports surged 24.5% (which added 2.43 points), reflecting more international travel to the U.S. But imports rose for the sixth consecutive quarter, soaring 17.7% (which also subtracted 2.43 points), as our economic recovery accelerated.