US GDP: Weakness behind the facade

GDP growth expectation for the fourth quarter of 2021 had been scaled back over the past couple of weeks as it became increasingly clear that the Omicron wave of Covid cases had hit the US economy hard. December retail sales collapsed, restaurant dining and air passenger numbers had fallen around 30% versus baseline and people movement slowed sharply as consumer caution took hold ahead of the festive season.

In the end, the outcome is much better than expected at the headline level with the economy recording annualised growth of 6.9% versus the 5.5% consensus, but the devil is very much in the detail.

Inventory rebuilding contributed 4.9 percentage points to the total, led primarily by the auto sector. Given ongoing supply disruption, we can’t count on this continuing to support growth in coming quarters. Outside of inventories this was a fairly weak report. Trade did fine with exports surging 24.5% and import jumping 17.7%, but overall the net trade contribution to growth was 0% after having subtracted 1.3 percentage points from headline growth in 3Q.

Consumer spending grew only 3.3%. After growth of 0.7% Month-on-Month in October and 0% in November, this implies real (inflation-adjusted) consumer spending plunged 1.1% MoM in December, which reflects the Covid consumer caution. Fixed Investment did barely anything, growing 1.3% annualised as residential investment fell 0.8%, while non-residential rose 2%. Rounding out the numbers, government consumption fell 2.9%.

As we look towards 1Q GDP we see a real chance that the US records negative GDP growth. With January consumer spending unlikely to show meaningful improvement on December, we are pencilling in flat consumer spending growth for the quarter even though spending should be much stronger in February and March. Then there is the risk that at least some of the 4Q inventory rebuild unwinds so this puts a lot of pressure on private investment, net trade and government spending to get us into positive GDP growth territory.

The Fed is well aware of these risks and Chair Jerome Powell’s press conference suggests they are prepared to look through near-term economic weakness, especially with inflation pressures showing no signs of abating. In any case, given Covid case numbers are falling in several states, we are hopeful that consumers will re-engage with the economy in February and March with strong household fundamentals of a strong jobs market and accrued income and wealth gains fueling spending. This should set us up for a very strong return to vigorous growth in the second quarter.