In better-than-expected GDP we trust

Recent market “we have bottomed” euphoria continues with major US indices trading in positive territory after the final estimate on US fourth-quarter GDP came in better than feared by most in the market.

The number came in at a better-than-expected -6.3 per cent contraction versus the prior estimate of 6.2 per cent, according to the release by the Bureau of Economic Analysis. Market consensus had been for a revision to as low as -6.6 per cent.

But let’s put the figure into context: it’s the weakest quarterly GDP reading since the first quarter of 1982.

Bank of New York Mellon, meanwhile, breaks down the following (emphasis ours):

Personal consumption fell an annualized -4.3% in Q4 (unchanged),
Gross private investment plunged -23.0% (from a previous Q4 estimate -20.8%),
Government consumption grew 1.3% (previously 1.6%),
While exports collapsed -23.6% (unchanged).

On a contributions basis, personal consumption subtracted -2.99% (previously -3.01%) to the headline annualized GDP figure of -6.3%, while gross private investment subtracted -3.47% (previously -3.11%), net exports subtracted -0.15% (previously -0.46%) and government consumption contributed 0.26% (previously 0.32%). The contribution to Q4 GDP from inventories was substantially reduced once again to -0.16% (from a prior 0.16% and an initial 1.32%).

While a better than expected Q4 reading is welcome, what is gained in Q4 will likely be taken away in Q1. Market expectations for Q1 GDP are approaching -5.0%, reflecting ongoing severe contraction. If the government’s assumptions about inventories and net exports remain as overly optimistic as they were for Q4, the advance Q1 GDP figure is likely to have a minus 2 or 3-handle, with downward revisions forthcoming.

Nevertheless there was a big positive surprise, according to Bank of New York Mellon — the upward revision to both personal consumption and net exports. As the bank explains:

Personal consumption subtracted -2.99% from Q4 GDP from a previous estimate of -3.01%, while net exports subtracted -0.15% from a previous -0.46%. With unemployment rising rapidly and credit markets effectively frozen, personal consumption should remain in negative territory in Q1, while recessionary conditions overseas keeping net exports in negative territory as well. 

Initial job claims last week, meanwhile, rose 8,000 to 652,000, topping 600,000 for an eighth straight time according to Bloomberg.

And while the US GDP figure may have positively surprised, in other global contraction news Ireland saw its economy plunge -7.5 per cent in Q4, much worse than even the most pessimistic forecast in a Reuters poll.

Related links:
The bad news on US trade
– FT Alphaville
Revision puts US GDP drop at 6.3%
– AFP

Copyright The Financial Times Limited 2019. All rights reserved. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.

Read next:

Read next:

FT Alpha Tweets