4Q2021 Gross Domestic Product: First (“Advance”) Estimate

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The Bureau of Economic Analysis (BEA) pegged its advance (first) estimate of 4Q2021 U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate (SAAR) of +6.89% (+5.7% expected), up 4.58 percentage points (PP) from 3Q2021’s +2.31%.

On a year-over-year (YoY) basis, which should eliminate any residual seasonality distortions present in quarter-over-quarter (QoQ) comparisons, GDP in 4Q2021 was 5.5% higher than in 4Q2020; that growth rate was slightly faster (+0.6PP) than 3Q2021’s +4.9% relative to 3Q2020. Total GDP was $603.7 billion (chained 2012 dollars) above its prior 4Q2019 peak.

Two groupings of GDP components -- personal consumption expenditures (PCE) and private domestic investment (PDI) -- were the drivers behind the 4Q expansion. Government consumption expenditures (GCE) detracted from the headline, while net exports (NetX) were neutral.

As for details --

PCE (Contributed 2.25PP to the headline, up 0.90PP from 3Q):

* Goods. Spending on non-durable goods (+$91.3 billion, nominal) was nearly 60% higher than on durable goods (+$57.7B), led by gasoline and other energy goods (+$46.1B).

* Services. Gains (+$233.8B) were broad-based and led by health care (+$55.3B).

PDI (Added 5.15PP, up 3.10PP from 3Q):

* Fixed investment (+$94.2B) was led by intellectual property products (+$35.3B)

* Inventories (+4.90PP, up 2.70PP from 3Q). Nonfarm inventories soared by +$286.0B.

NetX (Contributed 0.00PP, up 1.26PP from 3Q):

* Exports (+3.02PP from 3Q). Goods exports rose by $128.5B.

* Imports (-1.75PP from 3Q). Goods imports rose $168.2B.

GCE (Detracted 0.51PP, down 0.68PP from 3Q). Although GCE fell on a QoQ percentage basis, the category saw gains in absolute terms -- primarily in state and local consumption expenditures (+$33.9B)

Annualized growth in the BEA’s real final sales of domestic product, which excludes the value of inventories, was +1.99% (up +1.88PP from 3Q).

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Consumer Metric Institute’s Rick Davis summarized the key points of this report as follows:

“Unfortunately, over 70% of the headline number (4.90PP) came from growing inventories, while arguably another 25% came from underestimated inflation. The growth rate for consumer spending on goods was a meager 0.13%, and spending on consumer services was reported to be a modest 2.12%, down 1.45PP from the prior quarter.”

-- US economic growth in 4Q2021 is materially misrepresented by the headline number.

-- The BEA's own “bottom line” number (“Real Final Sales”) is less than a third of the headline at 1.99%.

-- Even the BEA's more reasonable “bottom line” number is significantly boosted by under-recognized inflation.

-- Since inventories are a long-term zero-sum number, what they give to the headline this quarter will certainly be taken away in future quarters. Companies overbought stock for what turned out to be a disappointing holiday season, by either overreacting to “supply chain” concerns or badly misreading household spending plans -- or both, since the heavy media coverage of the supply chain issues and lower household spending plans are likely related.

-- Household savings rates have moderated, with the moderation coming primarily from the reported lower disposable incomes.

“Every now and then the BEA's headline number wildly misrepresents the state of the economy. This is one of those times. Politicians will gladly cite the headline as proof of a healthy and growing economy. The truth is far murkier,” Davis concluded.

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.