Thursday, January 26, 2023

GDP - good for Q4, OK for 2022. Good spot today, but don't be complacent

We got more verification today that the US economy continued to grow at the end of 2022.
The nation’s gross domestic product, the value of all goods and services produced in the U.S., expanded at a seasonally adjusted annual rate of 2.9% in the fourth quarter, the Commerce Department said Thursday. Economists surveyed by Bloomberg had forecast a 2.6% rise in output.

Overall in 2022, the economy grew 2.1% following a 5.7% advance the prior year that was juiced by an easing pandemic.
Also, for those of you on INFLATION WATCH, that the GDP Price Index had its lowest quarterly price increase in the last 2 years. You take a step back, and it seems like we’re in a much better place than we were at the end of 2020.

Another good sign when you dig into the full report is that while inflation ebbed in the 2nd half of 2022, the dollar amount of American income growth did not. This meant significant real gains that clawed back some of the losses of the first half of the year.
Current-dollar personal income increased $311.0 billion in the fourth quarter, compared with an increase of $283.1 billion in the third quarter. The increase primarily reflected increases in compensation (led by private wages and salaries), government social benefits, and personal interest income. Within government social benefits, the increase primarily reflected an increase in "other" benefits reflecting state stimulus payments to individuals in the form of one-time refundable tax credits. Disposable personal income increased $297.0 billion, or 6.5 percent, in the fourth quarter, compared with an increase of $242.4 billion, or 5.4 percent, in the third quarter. Real disposable personal income increased 3.3 percent, compared with an increase of 1.0 percent.

Personal saving was $552.9 billion in the fourth quarter, compared with $507.7 billion in the third quarter. The personal saving rate—personal saving as a percentage of disposable personal income— was 2.9 percent in the fourth quarter, compared with 2.7 percent in the third quarter.
This helped keep consumer spending moving along at a solid pace – up 2.1% (annual rate) on an inflation-adjusted basis, and accounting for nearly half of the overall economic growth in the quarter.

However, other parts of the GDP report indicated that housing and other parts of the economy had fallen on hard times. Residential home building subtracted nearly 1.3% from overall GDP growth in Q4, and single-handedly dropped GDP growth for the year from nearly 2.7% to 2.1%. And real consumer spending on goods actually declined in 2022, as people cut back and downscaled in the face of multi-decade spikes in gasoline and food prices.

Even Q4’s solid 2.9% growth figure is a bit misleading, as inventories accounted for 1.46% of that number. That's a good sign on the inflation front, but it also means not as much consumer and business activity was happening at stores and other final sellers as 2.9% would indicate.

It also could be that we are now reaching a new balance, where we started from a place of COVID-era depression, and shortages during the recovery. We're basically back to a level of GDP growth is back in line to where we were before we knew what COVID-19 was.

Now if those shortages are dissipating through some kind of cutback in production or slowdown in torrid spending, that may numerically be perceived as “recession”, but won’t feel that way in many areas of the economy.

But it doesn't mean that things are clear sailing these days. It's worth noting that Q4’s growth rate compares a midpoint from one quarter vs the other. We know that Q3 grew strongly as inflation receded throughout the Summer, and Q4 started off almost as strong as that 5.7% quarter did. But things faded from there, and we have seen November and December have several red flags, including declines vs October in retail sales, housing starts, industrial output, and manufacturing activity.

Those are definitely warning signs as 2023 begins, but we have yet to see this translate into any increase in jobless claims or in slowdowns on the services side of the economy.

The question for 2023 is if the Federal Reserve will see that the real economy is already falling in some areas (especially in housing), inventories are up, and inflation is in check. They hopefully then use that reality to back off of its rate hikes sooner than later, to allow the economy to have a soft landing instead of a crash that ripples through all areas of the economy, and causes real pain and joblessness.

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