Friday, January 27, 2017

27/1/17: U.S. GDP Growth is Down, Not Quite Out...


So President Trump wants U.S. economy growing at 4 percent per annum. And he wants a trade tussle with Mexico and China, and possibly much of the rest of the world, or may be a trade war, not a tussle. And he wants tariffs on imports from Mexico to pay for the Wall. And all of this is as likely to support his 4 percent growth target, as a crutch is to support a two-legged sheep.

Take the latest U.S. GDP figures. The latest preliminary estimates for the 4Q 2016 U.S. GDP growth came out today. It is pretty ugly. The markets expected 4Q GDP print to come in up 2.2 percent, with some forecasters being on a much more optimistic side of this figure. Instead, q/q growth (preliminary estimate) came in at 1.9 percent. This puts full year 2016 growth estimate at 1.6 percent which, if confirmed in subsequent revisions, will be the one of the two lowest rates of growth over 2010-2016 period. In 2015, FY growth was 2.6 percent.

The key reason for the drop in growth that everyone is talking about is net exports. In 4Q 2016, net exports subtracted 1.7 percentage points from the U.S. GDP, which is the largest negative impact for net trade figures since 2Q 2010. This was ugly. But less-talked about was a rather not-pretty 1 percentage point positive contribution to GDP from inventories which was the largest positive contribution since 1Q 2015. And more: inventories overall contribution to 2016 FY growth was higher than in both 2014 and 2015.

Quarterly GDP Growth and Contributions to Growth
Source: ZeroHedge

Good news: business investment rose, adding 0.67 percentage points to overall growth, and private sector equipment purchases rose 3.1 percent. Good-ish news: (after-tax) disposable personal income rose 1.5 percent in real terms on an annualised basis, but this marked the lowest growth rate in income over 3 years. Slower rate of growth in personal income over 4Q 2016 was down to “deceleration in wages and salaries”. Structurally, this suggests we might see some capex growth in 2017, while wages and salaries growth slowdown is likely to give way to more labour costs inflation, consistent with headline unemployment figures. If so, 1.6 percent annual growth can shift to 2-2.2 percent range.

Adding a summary to the above, BEA report notes:  “The increase in real GDP in 2016 reflected positive contributions from PCE [private consumption], residential fixed investment, state and local government spending, exports, and federal government spending that were partly offset by negative contributions from private inventory investment and nonresidential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.” In other words: borrowed money-based personal spending, plus borrowed money-based government spending, borrowed money-based property ‘investments’ were up. Capacity investments were down.

So, about that 4% target figure, Mr. President... time to hire some Chinese 'state statisticians' to get the figures right?..


In a final caveat: this is the first print of GDP growth and it is subject to future revisions.

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