Taking Apart Robust GDP Data

Q4 GDP came in at a robust +3.5% (versus 3.0% consensus). Let’s take a look at the individual components to see what we can glean from the data:

Personal consumption expenditures: +4.4%
Gross private domestic investment: -11%
Exports: +10%
Imports: -3.2%
Government consumption expenditures and gross investment: +3.7%

Gdp_q4_advance

 Chart courtesy of Barron’s/Econoday

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A few things stood out to me in this advance run (there are 2 subsequent revisions to GDP);

1) Consumers continue to spend money at a faster rate (4.4%) than their income is growing (3.5%). That may be unsustainable, but determining when it hits home is a mere guess. (obviously spending more than your income increases ain’t gonna help the household savings rate none either).

2) Residential housing remains the biggest drag on GDP; Non residential investment has picked up some of the slack from Housing, but it too is trending downward: The past few Qs have been 20.3% (Q2), 15.7% (Q3), 2.8% (Q4). Will office and mall construction follow housing? That certainly seems possible.

3) It is quite surpising to see consumer spending increase as imports drop, as we are , after all, an import loving nation. That suggests one number or the other is a likely revision candidate. 

Now, you may not be surprised to see this sort of chatter from me or the even more bearish Nouriel Roubini. However, you should be surprised to see it from level-headed columnists like Bloomberg’s Caroline Baum, and even more shocked to see it from the generally bullish Tony Crescenzi of Miller Tabak, and author of The Strategic Bond Investor.  He observed:

"I don’t mean to discredit the fourth-quarter gain completely, and I have been upbeat about growth, but the reported gain must be watered down to some degree. Let’s take a look at each of the four factors listed above and how we can interpret the data."

Crescenzi notes that business spending fell during the quarter — equipment and software dropped 1.8%, the 2nd decline in three quarters and the largest since Q4 2002. That’s consistent with the contraction in the Chicago PMI, suggesting the U.S. manufacturing sector is still decellerating.

The residential spending figure was called "sobering" — "it subtracted 1.2 points from GDP, and fell for a fifth consecutive quarter, by 19.2%. That follows decreases of 18.7% in the third quarter and 11.1% in the second quarter. The fourth-quarter decline was the highest since 1991…"

Also of note: The relatively large contribution from the government sector. Spending increased 3.7%, with Uncle Sam spending  4.5% more, largely due to an 11.9% spike in defense spending. State and local spending increased 3.3%. Government added 0.7% of the Q4 GDP gains.

Where Tony really surprised me, however, was his take on personal spending. 

"On the surface, the figure looks solid, increasing 4.4%. The problem, however, is that it reflects a gain of just 3.6% in nominal spending because the personal consumption deflator fell 0.8%, its first decrease since 1961 and the largest decline since 1954, according to Market News.

This means that if the inflation rate for the quarter were at a normal level, say, up 2.0%, personal spending would have seen a very small gain of just 1.6% for the quarter. (I get this by subtracting 2.0% from 3.6%.)

The low level of nominal spending, which was the weakest in four years, reflects strain on the consumer. This figure represents the total amount of money that consumers spent during the quarter, a tally that looked good only because they caught a break with the decline in energy costs. Had energy costs increased, it would have produced a much different result. For context, nominal spending in the overall economy has increased at a pace of 5.6%; it increased at a pace of 5.0% in the fourth quarter."

 

The bottom line: A good number, but with some hair on it, likely benefiting from warmer weather, government spending, decreased energy prices — but also likely subject to further revisions.

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Sources:

GROSS DOMESTIC PRODUCT: FOURTH QUARTER 2006 (ADVANCE)
BEA, January 31, 2007  (PDF)
http://www.bea.gov/bea/newsrelarchive/2007/gdp406a.htm

Q4 GDP Growth at 3.5%: What It Means and What It Implies for 2007
Nouriel Roubini
RGE, Jan 31, 2007
http://www.rgemonitor.com/blog/roubini/175615

Taking Apart the Tainted GDP Data
Tony Crescenzi
RealMoney.com, 1/31/2007 12:52 PM EST
http://www.thestreet.com/markets/economics/10336056.html

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