The growth outlook enters 2020 on unsteady footing, linked to a far less attractive composition of growth, the shutdown of 737 Max production at Boeing and global growth headwinds that may pick up linked to the coronavirus crisis across the globe.
The U.S. growth picture on Thursday arrived spot on with the 2.1% economic consensus driven by solid but slowing personal consumption and strong government spending. The large drop in imports, along with the noticeable easing of spending in the fourth quarter, does denote some caution on the growth picture in light of growing domestic and global risks.
The growth outlook enters 2020 on unsteady footing, linked to a far less attractive composition of growth, the shutdown of 737 Max production at Boeing and global growth headwinds that may pick up linked to the coronavirus crisis across the globe. This is clearly affecting markets, with the yield on the 10-year U.S. government security trading near 1.57, down 34 basis points since the beginning of the year. But for now, this will not move the needle on policy out of the Federal Reserve, which clearly prefers to spend 2020 on the sidelines, and out of the harsh political spotlight.
Given that 2020 is an election year, all economic data tends to get politicized. We have long argued that one way to depoliticize the growth data is to deemphasize the volatile top line number that can often be misleading regarding the true long-term trend in growth and focus on real final sales and gross domestic purchases. Unfortunately, we got a data series that is all over the place in terms of directional guidance this quarter, with real final sales at 3.2% and gross domestic purchases at 0.6%. Thus we will split the difference and it does appear that the economy is growing just above its long-term average of 1.8%. Next week’s January U.S. employment estimate will feature a benchmark revision that will likely observe a downward revision of 500,000 jobs to total employment; that will cause many to take another look at the spending and growth outlook for the first half of 2020, which appears increasingly challenging.
Good fundamentals
One nagging concern underlying the report was the slowing in personal consumption to 1.8% from 3.2% in the third quarter of 2019.
Underlying fundamental estimates of growth showed an economy that continues to chug along at a slow and steady pace. Gross domestic purchases increased 0.6%, final sales to domestic purchasers advanced 1.6%, final sales to private domestic purchasers rose 1.6% and real final sales jumped 3.2%. Growth on a year-over-year basis was up 2.3%, above the long-term trend of 1.8%. The composition of growth is clearly a source uncertainty heading into 2020. Gross private investment declined -6.1%, with non-residential investment shrinking by -1.5%. Outlays on structures declined by -10.1% and equipment contracted at -2.9%. While, spending on intellectual property increased 5.9%, this is not the type of productivity-enhancing investment one wants to see, given the large business tax cut enacted less than two years ago. The only real bright spot in the entire investment picture was the stronger-than-anticipated increase of 5.8% in residential investment.
One nagging concern underlying the report was the slowing in personal consumption to 1.8% from 3.2% in the third quarter of 2019. Outlays on goods eased to 1.2% from 5.3%. Spending on durables increased 2.1%, in contrast with 8.1% previously, while purchases of non-durables inched forward by 0.8%, compared with 3.9% during the prior quarter. Demand for services increased 2%, down from 2.2% in the third quarter.
The trade deficit narrowed in the fourth quarter, with imports falling by -8.7% and exports increasing by 1.4%. This aspect of the report does not jibe with advance trade data, so we do think that there is a risk that there will be a downward revision to top line growth once all of the quarterly data is obtained.
One of the bright spots in the GDP report was the 2.7% increase in government consumption, which was up from the 1.7% previously. Federal spending increased by 3.6%, outlays on national defense jumped 4.9%, non-defense spending by 1.6%, while state and local spending increased by 2.2%.
