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Friday, January 29, 2016

4Q2015 Gross Domestic Product: First (Advance) Estimate

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In its first (“advance”) estimate of 4Q2015 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) reported the U.S. economy was growing at a +0.69% seasonally adjusted and annualized rate (SAAR), well below the +0.9% expected and down 1.30 percentage points compared to 3Q.
Groupings of GDP components show that personal consumption expenditures (PCE) and government consumption expenditures (GCE) contributed to 4Q growth whereas private domestic investment (PDI) and net exports (NetX) detracted from it. Overall, key line items in this report exhibited material deterioration relative to 3Q. Growth in 4Q consumer spending was less than half that reported in 3Q (although virtually all of the erosion was in spending for goods); growth in fixed investments nearly disappeared, as did growth in governmental spending. Moreover, exports tumbled into outright contraction.
The ongoing slowdown in inventory accumulation exerted less of a drag on GDP growth in 4Q. In 2Q, the value of inventories jumped by +$113.5 billion SAAR; 3Q: +$85.5 billion; 4Q: +$68.6 billion. I.e., the accumulation of inventories slowed GDP growth by -$16.9 billion SAAR in 4Q instead of -$28.0 billion in 3Q. Another “positive” observation (at least given the way GDP growth is computed) was that imports also were less of a drag on the rest of the economy -- although that was the result of both lower oil prices and generally weakening demand (the latter evidenced by real final sales of domestic product falling to less than half of the 3Q estimate). Recall that since imports subtract from GDP, a reduction in imports boosts GDP growth.
For this report the BEA assumed an annualized deflator of 0.82%. During October-December 2015 the inflation rate recorded by the Bureau of Labor Statistics (BLS) in its CPI-U index was 0.47%. Were the BEA's nominal data deflated using 4Q CPI-U inflation rate, the headline GDP growth number would have been a somewhat more optimistic +1.04%. 
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This report should be a “wake-up call” for anyone who thinks the U.S. economy is steaming forward in relative isolation from the rest of the globe:
* The headline growth rate dropped by nearly two-thirds, thanks primarily to much weaker growth in consumer demand for goods and commercial fixed investments.
* Exports fell into significant contraction.
* The sustained growth in consumer spending for services is not discretionary -- it is primarily a consequence of rising Obamacare healthcare costs. In fact nearly one-fourth of the 4Q2014-to-4Q2015 increase in total GDP is attributable to healthcare expenditures.
* The quarter-to-quarter increase in the household savings rate (to 5.4%) goes a long ways towards explaining the ongoing weak retail sales. Household funds not being spent at the gasoline pump or on healthcare premiums are simply being saved. This implies households’ view of the future is not particularly positive.
* Finally, the numbers above show materially weaker economic growth within the United States, after several prior lackluster quarters (2Q2015 being something of an exception, although growth during even that quarter could hardly be described as “stellar” in historical context). There is a downward trend in the numbers that, absent a miracle, points to economic contraction in the near future.
The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

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