4Q2017 Gross Domestic Product: Third Estimate

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In its third and final estimate of 4Q2017 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) reported that the U.S. economy was growing at a +2.88% seasonally adjusted and annualized rate (+2.7% expected), up 0.35 percentage point (PP) from the previous estimate (“4Qv2”) but down 0.28PP from 3Q.

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 it.

The boost in the headline number resulted from upward revisions to contributions from consumer spending (+0.17PP) and inventories (also +0.17PP, mainly the result of a contraction in inventories that was smaller than previously estimated). No other line items changed materially. Real final sales of domestic product (which excludes inventories) increased to +3.41%, up 0.18PP from 4Qv2 and +1.04PP from 3Q.   

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Commentary from Consumer Metric Institute’s Rick Davis:

“The boost in the headline number came equally from consumer spending and inventory revisions. The only other material change was the deteriorating household savings rate. The major takeaway from this report is the latter.

“Despite the current happy unemployment numbers, household disposable income and savings rates remain weak. The savings rate (2.6%, down 0.8PP from 3Q and more than -1.0PP from 2Q2017) is lower than the level seen at the brink of the "Great Recession" and disposable income has grown less than 7% in aggregate over the past 10 years.

“As we mentioned last month, the stagnant household income numbers should (in theory) get a boost in 1&2Q2018 from the Tax Cuts and Jobs Act of 2017. The withholding changes should have been rolled out during 1Q and will be in effect for the entire 2Q.

“We will be watching closely to see when the improved take-home pay translates into higher consumer spending. It is likely that the spending boost will lag by a quarter or more while household budgets (and savings rates) regain some breathing room.”

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.