The GDP initial estimate reports a weak 1.9% economic growth for the 4th quarter. Imports really hammered GDP, just in time to validate now President Trump. Consumer spending was lower while changes in private inventories added a full percentage point to Q4 GDP. Generally speaking this report shows just how much imports can slow economic growth. U.S. Exports curtailed and as a result, -1.7 percentage points of GDP were lost in Q4. Yes America, the trade deficit is back.
As a reminder, GDP is made up of: where Y=GDP, C=Consumption, I=Investment, G=Government Spending, (X-M)=Net Exports, X=Exports, M=Imports*. GDP in this overview, unless explicitly stated otherwise, refers to real GDP. Real GDP is in chained 2009 dollars.
The below table shows the GDP component comparison in percentage point spread from 2016 Q3 to Q4. While the focus will be on trade, note that consumer spending was less in the 4th quarter as well. There are always two revisions after the initial quarterly GDP report release.
|Comparison of Q3 2016 and Q4 2016 GDP Components|
Consumer spending, C was less but not as weak as a year ago. Below is a percentage change graph in real consumer spending going back to 2005.
Goods spending was a 1.11 percentage points of contribution. Durable goods were 0.97 percentage points, a healthy showing while nondurable goods was a 0.32 percentage point contribution. Services were weaker in Q4, with a 0.58 percentage point contribution. Within services, health care was a 0.18 percentage point contribution to Q4 GDP, housing and utilities was 0.43 percentage points and almost half of what Q3 was. Gross output of nonprofit institutions contributed 0.27 percentage points to GDP growth. Graphed below is PCE with the quarterly annualized percentage change breakdown of durable goods (red or bright red), nondurable goods (blue) versus services (maroon).
Imports and Exports, M & X dramatically imploded with a -1.70 percent point contribution. This is the advance GDP estimate, hence actual trade data hasn't come in yet and imports are almost always revised. Right now exports by themselves subtracted -0.53 percentage points to GDP and imports reduced Q4 GDP by -1.17 percentage points. The next revision release is next month.
Government spending, G contributed almost nothing, 0.21 percentage points to Q4 GDP. Federal spending was -0.08 percentage points while state and local added 0.28 percentage points. Government spending has been an absentee player since 2010 in GDP growth. That may change if Trump gets his infrastructure building package through Congress.
Investment, I is made up of fixed investment and changes to private inventories. The change in private inventories alone was a +1.00 percentage point contribution. In Q3, changes in private inventories added 0.49 percentage points to GDP. Accelerated growth in private inventories really helped Q4 GDP. Below are the change in real private inventories and the next graph is the change in that value from the previous quarter.
Fixed investment is residential and nonresidential and was a 0.67 percentage point GDP contribution. Nonresidential was a 0.30 individual percentage point contribution Within nonresidential, structures subtracted -0.14 percentage points from GDP and equipment added 0.18 GDP percentage points.
Residential fixed investment was 0.37 percentage points to GDP. The below graph shows residential fixed investment.
Nominal GDP: In current dollars, not adjusted for prices, of the U.S. output,was $18,860.8 billion, a 4.0% annualized increase for Q4 from Q3. In Q3, current dollar GDP increased 5.0%, showing inflation impacted real GDP more in Q4.
Real final sales of domestic product is GDP - inventories change. This figures gives a feel for real demand in the economy. This is because while private inventories represent economic activity, the stuff is sitting on the shelf, it's not demanded or sold. Real final sales increased 0.9%, which is just terrible.
Gross domestic purchases are what U.S. consumers bought no matter whether it was made in Ohio or China. It's defined as GDP plus imports and minus exports or using our above equation: where P = Real gross domestic purchases. Real gross domestic purchases increased 3.5% in Q4. Exports are subtracted off because they are not available for purchase by Americans, but imports are available for purchase in the U.S. When gross domestic purchases exceed GDP, that's actually bad news, it means America is buying imports instead of goods made domestically.
The price index for gross domestic purchases increased 2.0% for Q4. The PCE price index was 2.2% for Q4 and in Q3 was 1.5%. Without food and energy considered, the core price index increased 1.3%. In Q3, without food and energy considered, was 1.7%. The Federal Reserve's target inflation rate is about 2.0% without food and energy considered.
Below are the percentage changes of the Q4 2016 GDP components, from Q3. There is a difference between percentage change and percentage point change. Point change adds up to the total GDP percentage change and is reported above. The below is the individual quarterly percentage change, against themselves, of each component which makes up overall GDP. Additionally these changes are seasonally adjusted and reported by the BEA in annualized format. Durable goods by themselves showed a a solid 10.9% increase. Goods imports increased by 10.9% Residential investment showed a 10.2% quarterly decrease.
Q4 2016 GDP Component Percentage Change
|Component||Percentage Change from 2016 Q3|
This GDP report is really worse than it looks. Much of the bad news was masked by a growth acceleration in private inventories. The trade deficit coming roaring back is no surprise and once again shows how imports really cuts into U.S. economic growth. The weak demand shown by real finally sales was the worst of this report. Mediocre consumer spending didn't help matters. The only goods news is one quarter does not a GDP make and the advance report is often revised beyond recognition to the initial release.