Another Take on Q4 GDP

February 26th, 2016 10:36 am | by John Jansen |

Via Stephen Stanley at Amherst Pierpont Securities:

Real GDP growth in the fourth quarter was surprisingly revised up from the first print of 0.7% annualized to a 1.0% gain.  However, the divergence from my forecast of +0.3% was entirely accounted for by an upside surprise to inventories.  The monthly data for December had pointed to a downward adjustment to inventories, but the BEA noted that revisions to price data led to a big adjustment to the inventory valuation allowance (IVA), which took the real inventory figure from $68.6 billion to $81.7 billion.  Unfortunately, this means that Q1 forecasts should come down pretty much on a dollar-for-dollar basis.  In fact, I came into the day at 2½% for Q1 and may be hard pressed to get to 2% based on the new Q4 data (I will refine my Q1 forecast after the 10:00 January consumer spending data are released).

Despite the upside surprise to the headline, real final domestic demand was actually marginally weaker than expected, as the gauge was revised from a 1.6% rise to a 1.4% gain.  Real consumer spending growth was shaved from 2.2% to 2.0% based on new data on gasoline sales, apparel prices, and new motor vehicle registrations.  Business fixed investment was essentially unrevised, as a small downward adjustment to structures was roughly offset by a slight upward revision to equipment.  Government spending was lowered to account for softer state and local government construction figures for December, while federal outlays for defense were also revised downward.  Finally, the trade balance narrowed from the preliminary reading.  In sum, real final demand turned out to be marginally weaker than the preliminary print.  The sub-par 1.4% gain in real domestic demand, however, likely will not be repeated, as consumer spending is likely to bounce back in Q1.  While a significant inventory drag may pull down the headline Q1 figure (especially relative to economists’ tracking estimates entering the day), real final domestic demand should settle back into the 2½% to 3% range that prevailed over the past two years.

The core PCE deflator for Q4 was revised upward ever so slightly, from an annualized 1.2% pace to a 1.3% rise.  However, the size of the revision is tiny and is probably only worth about two hundredths on the year-over-year increase through December.  I will say, however, that this is enough to bring 1.7% into play as a low probability risk for the January year-over-year reading (out at 10:00 this morning).  My point estimate of +0.24% for the January m/m core PCE deflator may yield a 1.63% unrounded year/year increase.  Thus, if the January figure is a few hundredths higher than I expect, 1.7% is not entirely out of the question.  On the other side, the consensus projection of 1.5% for the y/y advance in January is increasingly unlikely.  It would take a monthly gain of 0.15% or less, only about half of the core CPI increase, to allow the January y/y figure to round down to 1.5%.

One final note on the GDP release.  The BEA incorporated benchmark data on wages and salaries for the third quarter into its income estimates.  This resulted in a downward revision of about $26 billion to the quarterly gain in wage and salary income, though the annualized advance for the period was still a solid 3.2%.  The Q4 gain was similarly shaved from a 3.2% pace to a 2.5% clip.  As a result, the savings rate for Q4 was revised down from 5.4% to 5.1%.

Meanwhile, the advance trade report for January showed a deterioration of about $1 billion in the goods balance last month to -$62.2 billion.  This is somewhat worse than expected, though not by enough to radically alter Q1 growth estimates.

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