According to the advance estimate released by the Bureau of Economic Analysis, the U.S. economy stuttered in Q4 – growing a mere +0.7% from +2.0% growth in Q3.
Although this flattish growth was in-line with expectations, it has still created some worries. Major impediments to growth were declining personal consumption expenditures, decreased local and state government spending, downturn in non-residential investments and persistent weakness in the manufacturing sector. The strong dollar only added to the headwinds, as corporations struggled to maintain sales volumes abroad.
Consumer spending, which accounts for a lion’s share of U.S. economic activity, grew 2.2% in the last quarter, which sounds fine but was actually down 80 basis points from the previous quarter. Decreased spending in the last quarter was largely owing to the unusually mild weather, which led to a cut down in the consumer spending on utilities and apparels.
Another concern was the growing private savings rate, which touched 5.4% in December 2015 and was up by 2 basis points from November – indicating that Americans are hesitant to spend (perhaps reflecting some apprehension about the economy’s future).
At first glance it may seem as though negatives are ruling the day, but there have also been a number of positives. There was a surplus of inventory in the last quarter but it still declined by nearly 20% compared from the third quarter, a good sign; investment in the residential construction sector rose by nearly 8.1% in the last quarter; rising house prices generally serve to boost household wealth; and increased federal government spending is on deck for 2016, given the passage of trillion-plus dollar budget last year.
Employment gains have been solid, averaging 284,000 over the past three months. The unemployment rate has remained at 5% during this period, but is expected to fall to 4.6%. Inflation remains “subdued” as a result of the effects of the recent rise in the dollar and the further plunge in oil prices, but is expected to move gradually toward 2% as those effects wane. In 2016, we expect a moderate growth rate of around 2.4%.
Bottom-line for Investors
Early in an economic cycle, GDP growth tends to be indiscriminate – growth typically benefits all sectors. Late in economic cycles, growth becomes more nuanced. Some sectors do well while others suffer and, taken even further, investors can find sub-sectors or industries within a sector that manage to grow earnings even in challenging times. Now is one of those times – GDP growth is positive on balance, but it takes more work to figure out where that growth is actually coming from.
Disclosure