4Q2015 Gross Domestic Product: Third (Final) Estimate

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In its third (“final”) estimate of 4Q2015 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) adjusted the rate at which the U.S. economy grew -- from a +1.00% seasonally adjusted and annualized rate (SAAR) posted in February, to +1.38%. That +0.38 percentage point revision was somewhat of a surprise, as expectations were for no change; also, the published estimate was outside the upper bound of the consensus range. Despite the upward revision, 4Q’s GDP growth rate was still 0.61% below that of 3Q. Moreover, 4Q2015’s year-over-year growth rate was +1.98%, slower than 3Q’s +2.15%.

Groupings of GDP components show that personal consumption expenditures (PCE) contributed to 4Q growth whereas private domestic investment (PDI) and net exports (NetX) detracted from it. Government consumption expenditures (GCE) was essentially neutral.

For this revision, the biggest upward change (relative to the report released in February) in nominal-dollar terms was in recreational services (+$10.0 billion). The biggest downward change was in health care services (-$7.3 billion); health care represents nearly 25% of all expenditures on services, however, nearly on par with housing and utilities as well as expenditures on non-durables goods (e.g., food, clothing, and gasoline). The change in inventories shrank by $3.7 billion (from +$90.6 to +$86.9 billion). Net exports exerted a slightly smaller drag on GDP growth. Overall, 4Q GDP was reported to have grown by an additional $16.4 billion compared to February’s estimate. 

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Consumer Metrics Institute summarized the GDP report as follows:

“At face value this report shows the U.S. to be the healthiest and fastest growing major developed economy -- which perhaps says much more about the global situation than it does about the domestic environment. Sadly, seven consecutive quarters of measurable growth and back-to-back quarters of slightly more than anemic growth (> +1%) does provide serious global bragging rights. And when ignoring inventories (which is highly recommended) that domestic growth becomes almost respectable at +1.60%.

“All of which frames nicely the dilemma faced by the Fed's FOMC -- a stable economy that appears to be neither contracting nor remotely in danger of overheating. Arguably a Goldilocks growth rate -- albeit obtained via unprecedented and sustained monetary stimulus that by all rights should have stimulated far more.

“Given the domestic economic situation outlined above, we understand the Fed's hesitancy to raise rates. And we understand the delicacy of the global economic environment, which clearly has the economists at the Fed concerned. We also understand the Fed's pride when acting the part of senior member at the central banks club. We simply wonder why the Fed now believes that helping sustain the global economy is part and parcel of their charter and/or congressional mandate.”

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.