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4Q19 GDP: Strong Headline, Components Leave Concerns

January 30, 2020

Bottom Line: Economic activity at 2.1% annualized was stronger than expected in the advance reading for the 4th Quarter, in-line with the 3rd Quarter. There was cause for concern, though, as what appears to be a one-off decline in imports drove a substantial change in net exports, adding 1.5 percentage points (150bps) to the quarter. Consumption only added 120bps, down from 2-300bps in the prior two quarters. Business fixed investment was a drag on growth of 20bps. Government purchases were stronger than expected, adding 50bps. On net, looking through the volatility of the components of 4th Quarter growth, there was a clear slowdown in consumption, the core driver of growth. While this is not unusual, it bears watching going forward. The economy has been growing for the past 41 quarters at an average annualized growth rate of 2.9% with the last three quarters of 2019 coming in closer to 2%.

Gross Domestic Product ROSE by 2.1% in the 4th Quarter, in line with market expectations for an increase of 2.1%. During the 10.3 years of economic expansion, the economy grew at an average annual rate of 2.9% after declining at a 2.9% rate during the recession. Economic activity is now 2.3% ABOVE its year-ago level and 28.2% ABOVE its pre-recession 2007 Q4 cyclical peak.

Inventory Investment FELL by $63.0 billion, subtracting 1.09 percentage points from overall economic activity. Consequently, Real Final Sales ROSE by 3.2% and is now 2.7% ABOVE its year-ago level.

Imports FELL by 8.7% and Exports ROSE by 1.4% so Net Exports ROSE by $88.1 billion. This implies that Real Final Domestic Demand ROSE by 1.6% and is now 2.3% ABOVE its year ago level.

Consumer Spending ROSE by 1.8%, contributing 1.20 percentage points to economic growth.

Business Investment FELL by 1.5%, subtracting 0.20 percentage points to GDP. Intellectual property products increased by 5.9% while non-residential structures declined by 10.1%. Residential Investment ROSE by 5.8%, adding 0.21 percentage points to economic growth.

Finally, Government Purchases ROSE by 2.7%, adding 0.47 percentage points to GDP. This was its 9th positive contribution in the last 12 quarters.

The GDP Price Index ROSE by 1.4%, compared with market expectations of 1.8%. This is also 1.7% ABOVE its year ago level.

Article by Contingent Macro Advisors