4Q2019 Gross Domestic Product: First (“Advance”) Estimate

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The Bureau of Economic Analysis (BEA) pegged its advance (first) estimate of 4Q2019 U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate (SAAR) of +2.07% (2.1% expected), down 0.04 percentage point (PP) from 3Q2019’s +2.11%.

On a year-over-year (YoY) basis, which should eliminate any residual seasonality distortions present in quarter-over-quarter (QoQ) comparisons, GDP in 4Q2019 was 2.32% higher than in 4Q2018; that growth rate was slightly faster (+0.25PP) than 3Q2019’s +2.07% relative to 3Q2018.

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

Consumer spending rose at a 1.2PP pace in 4Q, a substantial slowdown from gains of 3.2PP (2Q) and 2.1PP (3Q). The headline got a bigger boost -- though likely a short-lived one -- from a sharp decline in the U.S. trade deficit. Exports contributed 0.17PP while the drop in imports bumped up the headline by 1.32PP. The fall-off in imports stemmed mostly from an increase in U.S. tariffs on Chinese goods last September. Companies rushed to beat the tariff increases, then cut back on import orders as the measures went into effect.

The business side of the ledger held the economy back again. Nonresidential fixed investment subtracted 0.2PP from the headline, which was a modest improvement from 3Q’s -0.3PP. The big hit to PDI came from inventory growth, which sank in large part due to last autumn’s strike at General Motors that crimped auto production. Residential activity was a bright spot in an otherwise gloomy PDI -- with a modest (0.04PP) acceleration.

Government spending, meanwhile, contributed 0.47PP to the headline -- largely reflecting an increase in outlays on ships, planes, missile systems and other military hardware.

For this estimate the BEA assumed an effective annualized deflator of 1.50%. During 4Q the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was significantly higher at 3.39%. Underestimating inflation results in optimistic growth rates, and if the BEA's nominal data was deflated using CPI-U inflation information the headline growth number would have been a minuscule 0.22%.

The BEA’s growth in real final sales of domestic product, which excludes the effect of inventories, jumped by nearly one-half, to +3.16%, up 1.02PP from 3Q2019. 

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“Some people will take the BEA's "bottom line" number (i.e., the real final sales of domestic product) from the report at its very attractive face value of +3.16% growth,” wrote Consumer Metric Institute’s Rick Davis. “If so, they will be seriously misled. Sadly the key points of this report can be summarized as follows:

-- Correcting for inflation using data from the Bureau of Labor Statistics gives us a headline of only +0.22% growth.

-- The headline was supported by a huge swing in imports -- which in the BEA's calculation matrix actually results from weakened (exchange rate adjusted) domestic demand for foreign goods.

-- Inventories can contract for one of two reasons: either companies can't keep up with demand, or they are allowing inventories to contract because of lower demand. Unfortunately, the consumer and commercial spending lines tell us that the latter seems far more plausible.

“Neither consumers nor fixed investments are driving the headline number,” Davis concluded. “Because of that, the cosmetics of this report are far more glamorous than the reality would suggest.”

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.