Q4 GDP Rises 2.1%, Beating Expectations As Plunging Imports Offset Consumption Slump

After rising 2.1% in the third quarter, moments ago the BEA reported its first estimate of Q4 GDP, which was unchanged from the last quarter, rising at an annual rate of 2.1%, beating expectations of a 2.0% print despite a miss in personal consumption, with the GDP number benefiting from a surge in net trade as a result of a 1.32% boost from imports.

Ironically, the trade war-related slide in imports gave an outsize boost to the GDP calculation, as consumer spending cooled and nonresidential business investment registered a third straight drop, for the longest slump since 2009.

The fourth-quarter increase in real GDP reflected increases in consumer spending, government spending, housing investment, and exports which were partially offset by decreases in inventory investment and business investment. Imports, a subtraction in the calculation of GDP, decreased.

What is notable is that after surging in Q2 and Q3, personal consumption moderated sharply to 1.8% SAAR from 3.2% in Q3, missing expectations of 2.0% print, and contributing 1.20% to the GDP number from 2.12% last quarter, growing at the slowest pace in three quarters.

The Q4 breakdown was as follows:

  • Personal consumption: 1.20%, down from 2.12%
  • Fixed Investment: 0.01% up from -0.14%
  • Private Inventories: -1.09%, down from -0.03%
  • Exports: 0.17% up from 0.11%
  • Imports: 1.32% up from -0.26%
  • Government: 0.47%, up from 0.30%

The increase in consumer spending reflected increases in goods (led by clothing and footwear) and services (led by health care). The increase in government spending reflected increases in both federal and state and local government. The decrease in inventory investment reflected a decrease in retail trade inventories (led by motor vehicle dealers). The decrease in business investment reflected a decrease in structures (led by mining exploration, shafts and wells) and equipment (led by industrial equipment).

Government spending also gave GDP a boost, with gains in both federal and state and local outlays.

As noted above, the hail mary in this report was net trade which accounted for 1.49% of the 2.08% GDP number (of which imports were 1.32%), the most since 2009. The irony is that this was actually negative as trade collapsed mostly in the form of plunging imports. Such a "boost" via net exports is the flipside to trade war and/or weaker consumption-investment-inventory figures, because unless the plunge in imports (a boost to GDP) is a function of rising domestic production (hardly), they actually reflect weaker domestic demand.

One bright spot was residential investment, which advanced at the fastest rate in two years, as builders picked up the pace of construction and prospective homebuyers benefited from low mortgage rates and a solid job market. Business investment in software was also solid.

Excluding trade, inventories and government, real sales to private domestic purchasers rose just 1.4%, the slowest pace since 2015, indicating weaker underlying growth.

Meanwhile, in good news for the market, the Fed's preferred inflation metric, PCE rose 1.3% Q/Q, dropping from 1.6% last quarter as prices of goods and services purchased by U.S. residents increased 1.5% in the fourth quarter after increasing 1.4% in the third quarter. Core PCE rose only 1.3% after increasing 1.8% in the third quarter, and missing expectations of a 1.6% increase.