Monday, January 30, 2017

Q4 GDP Slightly Lower—How About 2017?

Financial FAQs

Fourth quarter Gross Domestic Product growth slowed, mostly because of the strong dollar and weak foreign demand. But consumers held up their end with higher consumer sentiments, and businesses also began to invest in new plants and equipment again.

One reason for the weakness is surging domestic demand for imported goods, because consumers are buying lots of goods and services. So all-in-all, the U.S. economy is doing very well, with interest rates still low and domestic demand still strong.

Gross domestic product, the official score card for the economy, expanded at a 1.9 percent annual clip from October to December, the Commerce Department said. That’s a marked drop from a 3.5 percent growth rate in the third quarter and below the 2.2 percent consensus of Bloomberg. The drop was mainly because of lower exports (strong dollar) and higher imports, which are a subtraction in the calculation of GDP, increased.

Still, the increase in real GDP in the fourth quarter reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, residential fixed investment, nonresidential fixed investment, and state and local government spending.

And we have soaring consumer sentiment, as the University of Michigan Consumer Sentiment survey is now at 98.5 in January, at the cycle highs where it's been since the November election. Prospects for future income are the highest in a decade, though the sample is split between optimism among Republicans offsetting pessimism among Democrats. One fifth of the sample says it's a good idea to borrow in advance of possible rate increases, a 20-year high for this reading.

But the real hero of the week was durable goods orders for goods lasting more than 3 years, such as auto, appliances and aircraft. Even though December orders, pulled down by a swing lower in defense aircraft, slipped 0.4 percent, core capital goods orders rose 0.8 percent which is on top of an upward revised 1.5 percent gain in November.

This is the sign of the increase in sorely needed business investment in plants and equipment that will be needed to increase productivity and so economic growth in 2017. Year-on-year core capital goods orders (nondefense ex-aircraft) moved into the plus column for the first time since October 2015, at 2.8 percent to exceed total orders at 1.2 percent.

The graph tracks monthly dollar levels of core capital goods (at $64.5 billion in December) against all other durable goods (at $162.5 billion). This swing higher for capital goods has contributed to three straight quarters of gains, though small ones, for nonresidential investment in the GDP report. But progess is progess, says Econoday.

So we can only hope that President Trump doesn’t start too many trade wars, such as with Mexico, our third largest trading partner, if GDP growth is to improve from the past decade. For most of our exports and core capital goods depend on parts made elsewhere. We have a worldwide interconnected economy in other words that a trade war could harm greatly.

Harlan Green © 2017

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