David Page comments on US Q4 GDP growth figures

Key points

• Q4 GDP growth recorded 2.6% annualised, modestly below our 3.0% forecast.
• Faster import growth and a drop in inventory contributed to softer activity, but domestic demand was firmer with consumer, government and private investment spending accelerating.
• Excluding inventory and imports, final domestic sales posted their firmest quarter since 2010.
• Q1 GDP looks likely to be impacted by seasonal issues. The scale of increased worker compensation versus a dollar-induced uptick in inflation look set to determine the underlying pace. We expect growth around 2% at this stage.   
• We maintain our forecast for US GDP growth to accelerate to 2.5% in 2018 from 2.3% in 2017 – modestly below consensus.

Amidst a glowing set of outlooks for global and US economic activity, US Q4 GDP came in a little softer than our expectation at 2.6% (SAAR QoQ). We had forecast Q4 GDP at 3.0% since October and this had also evolved to be market consensus going into this report. The Atlanta GDP now tracker suggested a firmer 3.4%. 2.6% is the weakest pace of expansion since Q1, but is consistent with our expectation for 2017 growth to have risen by 2.3% as a whole, a marked acceleration on 2016’s 1.5%.

Two elements weighed on growth modestly more than we expected. Import growth rose by 13.2% annualised. This likely included some rebound after hurricane disruption to Gulf Coast ports, and although exports posted a solid 6.8% rise, the net effect was a 0.3% point reduction to GDP. Inventory also fell back more than we expected. Historically, the ISM manufacturing survey has provided a good (although not infallible) guide to inventory adjustment in the US (see chart below). The current deviation is one of the largest over the past 30-years and points to some upside growth risks if inventory catches up over the coming quarters. Against that, consumer spending posted a solid 3.7% annualised rise in Q4 – its strongest gain since Q2 2016, and private investment spending was almost modestly firmer than we expected at 7.7% annualised. Given economic weakness was centred in inventory and imports, excluding those factors and looking at domestic, final sales, the US posted its strongest quarter’s expansion since the rebound from recession in 2010.

Looking ahead, Q1 GDP is always a volatile quarter not helped by the Bureau of Economic Analysis’ acknowledged issues with seasonal adjustment in this quarter, which tends to result in sluggish growth in this quarter. These problems will be compounded this time by some expectation for greater worker compensation boosting household incomes, but with a rising oil and falling dollar that look set to push headline inflation higher, crimping some real income growth. For now, we anticipate another soft, ~2% quarter for growth. Our GDP forecasts for 2018 and 2019 at 2.5% and 2.1%, modestly below consensus forecasts of 2.6% and 2.2%.

Financial market reaction was also affected by President Trump’s comments from Davos, where he attempted a conciliatory and upbeat assessment combining America First with global co-operation and a rosy economic outlook. 2-year and 10-year yields were broadly unchanged, inching higher at 2.11% and 2.63% respectively. However, the dollar managed to rise by 0.25% (against a basket of currencies) following Trump’s speech and the release. Markets now price a greater than 90% chance of a Federal Reserve hike in March, something with which we concur.