4Q2017 Gross Domestic Product: First (“Advance”) Estimate

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In its advance (first) estimate of 4Q2017 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) pegged growth of the U.S. economy at a seasonally adjusted and annualized rate (SAAR) of +2.54% (2.9% expected), down 0.62 percentage point (PP) from 3Q2017’s +3.16%.

On a year-over-year (YoY) basis, which should eliminate any residual seasonality distortions present in quarter-over-quarter (QoQ) comparisons, GDP in 4Q2017 was +2.50% relative to 4Q2016; that was higher (+0.20 PP) than 3Q2017’s +2.30% relative to 3Q2016.

Three of the four groupings of GDP components -- personal consumption expenditures (PCE), private domestic investment (PDI), and government consumption expenditures (GCE) -- contributed to 4Q growth. Net exports (NetX) detracted from growth.

Although the headline number is down relative to 3Q, this report actually contains the strongest consumer spending growth (+2.58%) since 2Q2016. On the other hand, imports’ contribution (-1.96%) was the worst since 3Q2010; also, inventories flip-flopped from boosting the headline (+0.79% in 3Q) to being a major headwind (-0.67% in 4Q). Fixed investment (+1.27%), exports (+0.82%) and government spending (+0.50%) also boosted the headline. Moreover, real final sales of domestic product (which excludes inventories) improved substantially -- to +3.21%, up 0.84 PP from 3Q.

The jump in consumer spending is welcome as long as one ignores the fact that it was largely financed by debt; the household savings rate plunged to 2.6%, which is lower than even the 2.7% recorded in 3Q2007 -- at the very precipice of the Great Recession. 

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“This report is a shockingly mixed bag,” wrote Consumer Metric Institute’s Rick Davis, “Consumers contributed more than the net headline number, with poor showings by inventories and imports more than offsetting material growth in fixed investments, exports and government spending.” Notable takeaways Davis highlighted include:

-- Imports surged, even as the dollar weakened. Exports simultaneously increased materially. Clearly currency movement is not the only thing happening in the foreign trade arena.

-- Inventories once again wreaked havoc upon the headline number. What inventories gave last quarter they took away this quarter.

-- The big story, however, was household disposable income. And noteworthy was the fact that the 3rd quarter numbers were quietly revised sharply downward. But the real shocker was that household savings rates dropped below those last seen at the brink of the "Great Recession." All of the surge in consumer spending came from savings, not pay checks -- meaning that the surge is simply not sustainable.

“This report is more troubling upon reflection than the +2.54% headline might suggest,” Davis concluded. “Although the headline is sort of in the ‘Goldilocks’ zone for U.S. economic growth, having household income and the savings rate remind us of the summer of 2007 is unsettling at best.”

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.