Fourth Quarter GDP Revised Higher to 0.4 Percent, Details Stronger as Inventory Correction Subtracts 1.52 Percentage Points

GDP was revised higher to a gain of 0.4 percent at an annual rate in the fourth quarter, up from 0.1 percent that was previously reported for the fourth quarter. GDP undergoes three estimates; these data are for the third and final estimate, though the data may get revised in subsequent periods. The Bureau of Economic Analysis, part of the Department of Commerce, reports that the upward revision was attributable to nonresidential fixed investment. In the third quarter, GDP advanced at a 3.1 percent annual rate. Importantly, an inventory correction was behind the seemingly-anemic GDP results. The change in real private inventories subtracted 1.52 percentage points from the fourth-quarter change in real GDP, after adding 0.73 percentage point to the third-quarter change. Real final sales of domestic product – GDP without the contribution of inventories – advanced at a rate of 1.9 percent, which is not as anemic as the headline might suggest. The increase in real GDP in the fourth quarter primarily reflected positive contributions from personal consumption expenditures (PCE), which advanced 1.8 percent, adding 1.28 percentage points to GDP. Durable goods increased 13.6 percent, compared with an increase of 8.9 percent. Nondurable goods increased 0.1 percent, compared with an increase of 1.2 percent. Services increased 0.6 percent, the same increase as in the third. The 13.6 percent increase in spending on durable goods, which added a full percentage point to GDP, points to a more confident consumer, as these items are often big-ticket, discretionary items. In particular, consumers bought more cars and trucks, due in part to the fact that the average age of cars on the road is at a record high. Nonresidential fixed investment surged 13.2 percent, also adding 1.28 percentage points to GDP. This was for both structures and equipment and software. Companies investing more in equipment and software added 0.82 percent to GDP, as spending here advanced 11.8 percent. This is a positive for the economy, as it shows companies are more confident in the economy to invest more in their businesses. Meanwhile, housing was also a positive contributor to GDP. Residential fixed investment climbed by 17.6 percent, but because it is a rather small component of GDP, it added 0.41 percentage point. Federal government spending plummeted 14.8 percent, subtracting 1.23 percentage points. This was entirely concentrated in defense spending. Nondefense federal spending advanced at a 1.7 percent annual rate, adding 0.04 percentage points. Burdened state and local governments continued to cut back, with spending contracting 1.5 percent, reducing GDP by 0.18 percentage point. Falling exports were a drag on the economy, which subtracted 0.4 percentage points as exports fell 2.8 percent. Imports, which are a subtraction in the calculation of GDP, decreased 4.2 percent, adding 0.73 percentage points to GDP. Because falling imports offset falling exports, trade added 0.33 percentage points to GDP. Falling imports are likely related to the inventory correction, as companies imported fewer goods from abroad as inventory sentiment, as reported in the Institute for Supply Management data, suggests that inventories are “too high”. Thus, falling imports do not necessarily indicate weaker, underlying demand in the U.S. but rather less restocking of inventories. Motor vehicle output added 0.18 percentage point to the fourth-quarter change in real GDP after subtracting 0.25 percentage point from the third-quarter change. Final sales of computers added 0.10 percentage point to the fourth-quarter change in real GDP after adding 0.11 percentage point to the third-quarter change. Inflation remains tame, and below the Fed's 2 percent target. The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 1.6 percent in the fourth quarter, 0.1 percentage point more than the second estimate; this index increased 1.4 percent in the third quarter. Excluding food and energy prices, the price index for gross domestic purchases increased 1.2 percent in the fourth quarter, the same increase as in the third. Overall, this was not a weak GDP report. The weakness was due to companies not restocking shelves and warehouses to the same degree as they had before. As noted previously, this is due to businesses' sentiments that inventories are too high, and does not necessarily point to economic weakness, especially given how much consumers spent on durable goods and how much companies invested more in their businesses.