This morning we got the advanced Q4 GDP estimate, which saw the growth rate for Gross Domestic Product come in weaker than consensus estimates, a surprise to no one who regularly reads our work. Yesterday, the Atlanta Fed’s GDPNow model forecast was for 3.4% in Q4 while the Wall Street Journal survey of economists pinned the number at 2.9%. The reality was 2.6% is a solid number, but a decline from the 3.2% in Q3 and 3.1% in Q2. Overall 2017 saw the strongest growth rate since 2014, when GDP rose 2.7%.
Looking into the details here is what I found:
- The biggest driver of growth was consumption, adding 2.6% to GDP, versus adding 1.5% in Q3. Durable goods demand was quite strong, but some of that is a result of the string of brutal natural disasters which damaged/destroyed homes and autos. We also saw stronger spending on clothes and restaurants.
- Investment added just 0.6% to GDP versus 1.2% in Q3. The rate of fixed investment growth nearly tripled from Q3 but inventory dropped from adding 0.8% in Q3 to subtracting -0.7% in Q4.
- Trade was the big whopper here, removing 1.1% from GDP versus adding 0.4% in Q3. The export of goods was strong, rising to 1% in Q4 from 0.2% in Q3, but Imports detracted 2% from GDP, despite those stronger exports. The goods trade deficit made a new high, the largest since Q3 2008.
- Finally, government spending added 0.5% to GDP versus just 0.1% in Q3. The growth was at both the state/local and the federal level.
The bottom line is that growth in the fourth quarter was utterly consumer-dependent and the average consumer is financially stressed. The year over year growth in real earnings for roughly 80% of the population has been less than 1% over the past year, the personal savings rate has dropped to a decade low of 2.9%, and credit card debt has again reached record highs. Without material gains in wages, the current rate of spending growth cannot be maintained.