Despite the Beat, Q4 GDP Conceals Slowing Economic Momentum
At first glance, this week's GDP report revealed that the U.S. economy expanded at an above-trend pace in the fourth quarter. Underlying details, however, were less encouraging than the stronger-than-expected headline gain. When combined with the waning performance of recently monthly data, the Q4 GDP report suggests that the U.S. economy ended last year with a distinct loss of momentum that is likely to carry through into 2023.
Real GDP expanded at an annualized pace of 2.9% in the fourth quarter relative to the third quarter. This marks the second straight quarter of above-trend growth, as real GDP increased at a 3.2% pace in Q3. On a year-over-year basis, however, real GDP growth moderated to a 1.0% pace, down substantially from the 5.7% rate registered in Q4 2021.
The composition of fourth quarter growth was not nearly as strong as the headline figure would suggest. As businesses added nearly $130 billion to their stocks, the inventory build contributed a stronger-than-expected 1.5 percentage points to top-line growth, reflecting, in part, strength in manufacturing, mining and utilities. We are mindful that this inventory build could be unintended and, therefore, presents downside risk in Q1. Another surprise was net exports, which added 0.6 percentage points to headline GDP. Exports fell 1.3% reflecting deteriorating external demand, while imports declined 4.6% amid the ongoing deterioration in domestic demand for goods from abroad. Government outlays registered another solid performance in Q4, up 3.7%, with gains in both federal and local spending.
A better measure of underlying demand is real final sales to private domestic purchasers. Comprised of consumer spending and business fixed investment, this component represents the core part of the economy that is targeted by monetary policy. Real personal consumption expenditures increased at a healthy 2.1% annualized pace, with the strongest gains coming in services. Spending on "other" services (notably international travel), restaurant dining and health care led the way, suggesting consumers are not done yet making up for experiences held off during the pandemic. Unfortunately, consumer spending's pace was front-loaded in the quarter and does not truly reflect the underlying trend. On a monthly basis, real consumer spending contracted in December (-0.3%) and November (-0.2%), following a solid gain in October (0.4%) (chart). This weakening performance suggests that higher interest rates are taking a bigger toll on the all-important U.S. consumer. Moreover, the weakness exhibited at the end of 2022 places consumer spending growth on an uphill battle in Q1.
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What a crazy week. It’s hard to worry about something as relatively unimportant as economic trends when one thinks about what folks in Ukraine are enduring, but economies are nonetheless impacted.
