Solid growth in Q4
Housing, corporate spending and inventory restocking led the way.
The Commerce Department reported yesterday that the U.S. economy continued to rebound in the fourth quarter, albeit at a slower and more normalized pace, as GDP rose a slightly weaker-than-expected 4%. That compares with the outsized and unsustainable surge of 33.4% in the third quarter—the largest quarterly expansion since record keeping began in 1947.
The fourth quarter’s improvement was paced by strong results from housing, corporate spending and inventory restocking. On the negative side of the ledger, the growth in consumer spending was weaker than expected, largely due to the surge in Covid-19 infections and deaths. Those prompted some governors to reissue restrictions, negatively impacting leisure & hospitality employment. Congress finally got around to passing its $900 billion Phase 4 fiscal stimulus bill just before Christmas, but that support was too little, too late, in our view.
While exports were strong in the fourth quarter, imports fared even better due to the powerful rebound in the U.S. economy since midyear and the need to rebuild inventories. So, the growing net trade deficit subtracted from growth. Finally, except for spending on national defense, all federal, state and local government expenditures were sequentially down, reducing fourth-quarter economic growth.
While today’s GDP flash beat the Blue Chip consensus at 3.7%, it was actually weaker than the Bloomberg consensus at 4.2%, our own 5.7% forecast here at Federated Hermes and the Atlanta Fed’s GDPNow forecast if 7.2%.
Back to even by midyear We believe that the recession ended in May or June of last year, but we’re still waiting for the NBER to officially date its conclusion. GDP now approximates $21.48 trillion in current nominal dollars, only 1.2% below 2019’s fourth quarter count of $21.747 trillion, which was the last “normal” quarter. This means we’ve already recovered about 88% of the economic damage wrought by Covid. In chained dollars, fourth-quarter GDP approximates $18.78 trillion, 2.5% below the same period in 2019 at $19.254 trillion. We’ve recovered nearly 76% of the growth deficit based on this metric. Given our expectations for 3.9% growth (quarter-on-quarter annualized) in the current first quarter and 5.9% in the second, we expect the economy to rebound to pre-coronavirus breakeven levels by the middle of calendar 2021.
Strong fourth-quarter earnings We’re almost halfway through the fourth-quarter reporting season and S&P 500 results have been much stronger than expected. Revenues were expected to fall 1-2% year over year (y/y) but they have risen 1.6%, with about three fourths of the companies that have already reported beating consensus estimates by an average of 3.3%. Earnings were expected to decline 9-10% y/y, but they’ve risen 5% thus far, as 82% of the companies are beating consensus estimates by an average of 17.6%. That’s the third-highest beat rate on record, trailing only last year’s second quarter at 23.2% and the third quarter at 19.4%.
Details of the fourth-quarter GDP report:
Personal consumption, which accounts for nearly 70% of GDP, rose by a weaker-than-expected 2.5% in the fourth quarter (accounting for 1.70 percentage points of the overall gain) versus consensus expectations for a gain of 3.1%. This compares with a gain of 41% in the third quarter and a decline of 33.2% in the second (the steepest decline on record). In the wake of the surge in coronavirus infections during the fourth quarter, many states shut down bars and restaurants, throwing a half million leisure & hospitality employees out of work during the holidays. Congress added to the misery by delaying fiscal support to these businesses and workers by some five months. But the good news is that, as vaccinations accelerate over the next several months, these businesses will be allowed to reopen, employees will return to work and consumers with enormous pent-up demand and a flush 13.7% savings rate in December should begin to spend again.
Housing soared 33.5% in the fourth quarter, which added 1.29 percentage points to quarterly growth. That compares with an even more robust 63% spike in the third, its strongest since 1983, goosed by record-low interest rates and strong demand. That reverses the second-quarter decline of 35.6%, housing’s worst results since 1980.
Corporate capital spending rose 13.8% in the fourth quarter (adding 1.73 percentage points to GDP), versus a 22.9% gain in the third and a decline of 27.2% in the second, its steepest drop since 1952. Equipment spending again led the way with an increase of 24.9% after a 68.2% third-quarter surge. Accelerated equipment spending over the past six months could be related to business concern the Trump administration’s automatic expensing of capex investments could expire under President Biden. Structures rose 3% in the fourth quarter versus a 17.4% decline in the third. Intellectual property was steady, rising 7.5% last quarter after an 8.4% gain in the third.
Inventory accumulation rose a solid $44.6 billion in the fourth quarter (adding 1.04 percentage points), compared with a modest decline of $3.7 billion in the third and a sizable liquidation of $287 billion in the second. This positive trend should continue, as depleted inventory levels must be replenished if the economy accelerates over the course of 2021.
The deteriorating net trade picture reduced GDP by 1.52 percentage points in the fourth quarter. Exports rose a solid 22%, compared with a 59.6% spike in the third and a massive 64.4% second-quarter plunge amid the global recession. But import growth impressively outstripped the gain in exports. The U.S. economy has recovered more quickly than the rest of the world, driving businesses to restock their inventory from foreign suppliers. As a result, imports rose 29.5% in the fourth quarter, compared with a surge of 93.1% in the third and a significant second-quarter decline of 54.1%.
Overall net government spending declined by a modest 1.2% in the fourth quarter (subtracting 0.22 percentage points), compared with a larger 4.8% decline in the third and a gain of 2.5% in the second. These quarterly swings are largely related to fiscal-stimulus transfer payments. Defense spending rose 5%, while nondefense spending fell 8.4%. State and local spending declined 1.7%.
Private domestic final sales, which exclude volatile net trade, inventory building and government spending, rose by a solid 5.6% in the fourth quarter. That compares with 39% in the third and a decline of 32.4% in the second. This metric provides an excellent indication of the economy’s underlying fundamental strength.