Q4 GDP Unexpectedly Misses, Rising Only 2.6% Dragged By Soaring Trade Deficit

Consensus expected a 3.0% GDP print, with whisper numbers well above that and some expecting a print as high as 5%. However it was not meant to be, and as the BEA reported moments ago, the first estimate of Q4 GDP came in at  2.6%, missing expectations and below last quarter's 3.2% GDP print, and the lowest since the first quarter of 2017, largely as a result of a surging trade deficit in the fourth quarter.

What happened?

First the good news:  Personal consumption rose 3.8% in 4Q after rising 2.2% prior quarter. Final sales to private domestic purchasers q/q rose 4.6% in 4Q after rising 2.2% prior quarter; largest rise since Q3 2014. Spending contributed 2.58% to the bottom-line GDP print, the highest quarter since Q4 2014, however as we discussed previously, much of it was the result of a surge in credit card-funded spending while the personal savings rate dropped to levels last seen during the financial crisis.

Some more good news: nonresidential fixed investment - or spending on equipment, structures and intellectual property - rose 6.8% in 4Q after rising 4.7% prior quarter. It contributed 0.84% to the annualized Q4 GDP's bottom line.

However, both of these items were offset by a bigger than expected inventory destocking, as Inventories subtracted -0.67% from the final GDP number, the biggest drop since Q1.

But most notable was the sharp drop in GDP as a result of surging imports which subtracted -1.96% from the final GDP number. This was the biggest hit from imports to GDP going back all the way to Q3 2010. Net of exports, trade resulted in a -1.14% drag on GDP. Needless to say, for a president who is focused on boosting exports and reducing the US trade deficit, this number will only provoke more speculation about boosting US exports and thus, the possibility of trade war.



All of the above broken down visually by component:

Some other observations: real disposable personal income—personal income adjusted for taxes and inflation —increased 1.1% in the fourth quarter after increasing 0.5% in the third quarter. Personal saving as a  percentage of disposable personal income was 2.6% in the fourth quarter, compared with 3.3% in Q3,

For inflation watchers, prices of goods and services purchased by U.S. residents increased 2.5% in the fourth quarter
after increasing 1.7% in the third quarter. Excluding food and energy, prices rose 1.9% in the fourth quarter after increasing 1.6% in the third quarter.

Finally, for the year 2017, real GDP increased 2.3% compared with 1.5 percent in 2016.

The increase in real GDP in 2017 reflected increases in consumer spending, business investment, and exports. These contributions were partly offset by a decrease in inventories. Imports increased. Prices of goods and services  purchased by U.S. residents increased 1.8 percent in 2017, compared with an increase of 1.0 percent in 2016. Excluding food and energy, prices increased 1.7 percent in 2017 after increasing 1.4 percent in 2016.

Overall, a good first year for Trump who however will surely be disappointed by the substantial drag resulting from the trade deficit.