The Market Today

4Q GDP Shows Resilient U.S. Economy

by Craig Dismuke, Dudley Carter


4Q GDP Shows Resilient U.S. Economy: The shutdown-delayed 4th quarter GDP report showed better-than-expected growth with key sectors showing surprising resilience.  The economy expanded 2.6% QoQ, SAAR in 4Q which brought the year-over-year rate up to 3.1%, the 10th consecutive quarter of acceleration in the year-over-year rate.  Personal consumption grew 2.8% despite a decidedly bad quarter for restaurant sales, buoyed by a particularly strong November for retail sales and a 9.1% gain in auto sales.  Business investment bettered expectations rising 6.2% on a 6.7% increase in equipment spending and 13.1% jump in intellectual property investment.  Business investment in structures disappointed, falling 4.8%, along with another quarter of contraction for housing, down 3.5%.   Residential investment has now contracted in four consecutive quarters as declining affordability has taken a toll on the sector.  Despite the miss on business structures, the 6.2% headline gain for business investment will temporarily allay growing fears of contracting business investment.  Government spending slowed its recently improved rate of growth, up just 0.4% in 4Q on a 9-year high for defense spending (+6.9%) but a 5.6% decline in federal non-defense outlays.  While it is difficult to pinpoint the cause of the weakness, at least part of it was due to the uncertainty surrounding the government shutdown.  After some very volatile quarters, inventory changes and the external trade balance moderated in 4Q.  After adding 2.8% to the 3Q GDP tally, inventory growth only added 0.2% to 4Q’s total.  In contrast, after subtracting 2.4% from 3Q growth, external trade dragged just 0.3% from 4Q’s tally.


All told, the 4Q GDP report shows a more resilient economy than many feared after a disastrous quarter for the markets and global growth trends.  With final sales of 2.6%, the U.S. economy continued to chug along at an above-sustainable pace adding to its record streak of year-over-year growth acceleration.  This report will likely assuage some of the Fed’s concerns about the domestic economy; but, as always, the GDP report is old news and the economy’s resilience coming into 1Q will be the focus.


Fedspeak and Regional Activity Reports: The remainder of today’s calendar is filled with Fedspeak, the February Chicago Purchasing Managers’ index, and the Kansas City Fed’s regional report on manufacturing.  Atlanta’s Bostic speaks at 7:50 a.m. CT, Philadelphia’s Harker at 10:00 a.m., Dallas’ Kaplan at noon, Cleveland’s Mester at 6:00 p.m., and Chairman Powell at 7:15 p.m.  After two days of congressional testimony from Chairman Powell, it is unlikely that anything new is gleaned from today’s communications.



Yesterday – Investors Focused on Testimonies at Capitol Hill: U.S. stocks closed mixed Wednesday in response to a trifecta of testimonies on Capitol Hill. President Trump’s former personal attorney Michael Cohen’s testimony before the House Oversight Committee attracted significant media coverage and Fed Chair Powell wrapped up his semiannual testimony before the House Financial Services Committee in uneventful fashion (more below). But stocks’ sharpest response, a move lower, lined up with comments from USTR Lighthizer in a trade testimony to the House Ways and Means Committee. He said “If we can complete this effort – and again I say ‘if’ – and can reach a satisfactory solution to the all-important outstanding issue of enforceability as well as some other concerns, we might be able to have an agreement that turns the corner in our economic relationship with China, …Much still needs to be done, both before an agreement is reached, and more importantly, after it is reached.” President Trump had sounded more confident about a deal last Friday. Still, the S&P 500 slowly recovered from down 0.7% to end less than 0.1% lower. Energy companies were the top performers with crude prices climbing as much as 3.4% after a bullish U.S. inventory report. Health care, led by private health insurers, was the biggest drag on the index after House Democrats proposed the Medicare for All Act of 2019. Interest rates whipped higher Wednesday, both in the U.S. and across Europe. Yields in the UK jumped in response to expectations that a no-deal Brexit may be falling out of favor while U.S. Treasury yields’ early rise was partly blamed on heavy debt issuances in the private sector. The 2-year yield rose 1.6 bps to 2.50% while the 10-year yield added 4.7 bps to 2.68%.


Overnight – Shortened Summit, Softer Asian Data Stirs Up Market Caution: Global markets remained cautious overnight after Asian economic data disappointed and the U.S.-North Korea summit ended earlier than scheduled and without a deal on denuclearization. President Trump said, “Basically, they wanted the sanctions lifted in their entirety and we couldn’t do that, …I just felt it wasn’t good enough, …We had to have more.” Keeping the door open for another round of discussions, the President later said, “I’d much rather do it right than do it fast, …We’re in position to do something very special.” South Korea’s KOSPI dropped 1.8% to lead losses for major global equities. As to the data, Japan’s industrial production contracted 3.7% in January amid slowing global growth, the fourth biggest monthly contraction since the Great Recession, and retail sales rose less than half of expectations. In China, the Composite PMI fell to 52.4 in February, the lowest in three years, as services activity slowed more than expected and manufacturing contracted for a third month. Indices tracking manufacturing import and export orders, one barometer for how trade tensions are affecting the economy, contracted at their fastest paces since 2009. European stocks were less dour but still down for the day. Ahead of a busy U.S. economic calendar, U.S. equity futures were modestly weaker and Treasury yields had trimmed yesterday’s rise by just under 2 bps across the curve. After 4Q GDP topped estimates yields turned up and positive for the day (2s +0.4 bps, 10s +0.9 bps).



Pending Home Sales Ended Their Slide: Pending home sales finally found their footing in January after sliding in nine of the last 10 months. Total pending sales rose 4.6% to start 2019, the biggest monthly gain since October 2010 to their best pace in four months. Encouragingly, activity picked up across all four geographic regions with the two areas accounting for the largest share of existing sales leading the way. Pending sales in the South jumped 8.9%, the most since early 2010, to break a six-month downturn. Contract signings in the Midwest improved 2.8%, the best month since February 2017. The previous decline in mortgage rates was expected to eventually help stabilize activity in the housing sector. Although pending sales remained at their fourth weakest level since 2014 and down 3.2% from a year ago, the January rebound may reflect the beginning of the positive effects of lower rates.


Factory Orders Report Furthers Story of Slower Business Spending: December’s factory orders report disappointed expectations, in part because of negative revisions to initial estimates of capital goods activity. Total factory orders rose 0.1%, less than the 0.6% gain expected, and declined 0.6% if the volatile transportation category is removed (nondefense aircraft orders rose 28.4%). Capital goods orders, initially estimated to have declined 0.7%, actually pulled back 1.0%. The one positive from last week’s initial estimates of business spending on equipment, the 0.5% increase in shipments, was wiped out; shipments were unchanged from November. The final revisions add to concerns that business investment moderated into the end of 2018, a factor on the long list of uncertainties the Fed is patiently watching to discern what adjustments to interest rates, if any, might be needed later this year.


Powell Wrapped up Two Days of Testifying: As is typically the case, the House’s half of Fed Chair Powell’s semi-annual testimony provided less value per minute related to new insights into the Fed’s outlook. Powell essentially repeated his opening statement from Tuesday and was again asked about a wide-range of topics. On the existence of a “Powell Put”, the idea that the Fed’s head-whipping pivot to patience in January was solely based on the slump in equities, Powell responded, “Anything that matters for the dual mandate matters for us, and our tools work through financial conditions.” Falling equity prices are equated to tighter financial conditions. He later said “the stock market is one of many factors,” the Fed looks at. Addressing the current fiscal path, Powell said “debt cannot grow faster than GDP forever,” and “We worry…in the longer run…we’ll wind up spending our money on interest payments rather than the things we really need.” Trade uncertainty has caused some businesses to delay investments and student loans are likely holding back potential homebuyers.  This year’s reassessment of the policy framework is aimed at determining if there is a better way to reach the 2% target Powell said, clarifying “We are not looking at a higher inflation target. Full stop.” He repeated his uncertainty about the possible existence of additional labor slack saying, “The very strong labor market seems to be pulling people in, and holding people in from leaving.” On normalizing the balance sheet, Powell officially threw his support behind the Fed’s plan to end portfolio runoff “sometime later this year.”


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