4Q2018 Gross Domestic Product: “Initial” Estimate

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In its “initial” estimate (comparable to a combination of the more typical “advance” and “second” estimates) of 4Q2018 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 +2.59% (2.4% expected), down 0.76 percentage point (PP) from 3Q2018’s +3.35%.

On a year-over-year (YoY) basis, which should eliminate any residual seasonality distortions present in quarter-over-quarter (QoQ) comparisons, GDP in 4Q2018 was 3.08% higher than in 4Q2017; that growth rate was slightly faster (+0.07PP) than 3Q2018’s +3.00% relative to 3Q2017.

Three 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.

The headline number’s relatively modest -0.76PP QoQ change masked significant shifts in the underlying line items: contributions from inventory growth dropped by 2.20PP (from 2.33% to 0.13%), net exports added 1.77PP (from -1.99% to -0.22%), and consumer spending growth weakened by 0.46PP (from +2.37 to +1.92%). Growth in governmental spending shrank by 0.37PP (+0.44% to +0.07%), while commercial fixed investment accelerated by 0.48PP (from +0.21% to 0.69%).

Somewhat counterintuitively in relation to the drop in consumer spending, the BEA’s real final sales of domestic product growth, which excludes the effect of inventories, jumped to +2.46%, up by 1.44PP from 3Q. 

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“This initial report for 4Q2018 (delayed for a month by the ‘Great Shutdown’) is interesting in a number of ways,” wrote Consumer Metric Institute’s Rick Davis:

-- The net headline number remains in the "Goldilocks" zone, neither too hot nor too cold. In fact, at surface value, it can't justify a change in Federal Reserve policy in any direction. Clearly the Fed is stepping away from tightening because of the condition of the markets, not the condition of the economy.

-- That said, a deeper dive into the numbers reveals a second consecutive quarter of weakening growth in consumer spending. And the increase in the household savings rate explains to a large extent where any additional disposable income is actually going -- into savings in lieu of spending.

-- The unsustainable growth in inventories that propped up last quarter's gaudy headline has vanished. But it has been largely replaced by a dramatic (and equally unsustainable) swing in foreign trade.

“We don't pretend to understand the intricacies of household or consumer psychology,” Davis continued. “However, our own data suggests that, from time to time, consumer sentiment and spending can be suppressed by FUD (Fear, Uncertainty and Doubt). And the U.S. political stage is currently generating a lot of FUD. How that FUD is damaging the household/consumer psyche -- and hence the economy -- will become better understood over the next few quarters.”

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.