US Q4 Advance GDP thoughts - "Headline miss disguises core strength"
Overall this was a very solid GDP report when one considers some very disparate trends, particularly hefty drags from Inventories and Trade, at 2.3% y/y 2017 GDP was in line with expectations.
a) Personal Consumption - No surprises here at 3.8%, as had been well flagged by the strength seen in Retail Sales and Personal Consumption, even if a hefty contribution from Autos accounts for most of the boost relative to Q3's 2.2%. Housing Investment also posted a solid rebound of 11.6% vs. a drop of 4.6% in Q3, and in no small part a function of post hurricane reconstruction, which should start to tail off in Q1, though the inventories data from both Home Sales reports imply there is a need to keep up the pace seen in Q4.
b) Business Investment - Equipment Investment, as signalled by the Durables data, posted another very strong gain at 11.4% vs. 10.8% in the prior quarter, while investment in structures remained sluggish at 1.4%, with investment in intellectual property/software steady at 4.7%. For 2018 much will depend on what happens to the corporate monies that are repatriated as part of the tax reform, investors are apparently pushing for a bigger push on investment, but for some companies there may still a preference for share and/or debt buybacks / restructuring.
c) Inventories - This is as ever the item that may see some substantial revision, and to an extent the 0.67 ppt deduction from the headline is largely "payback" for the hefty 0.79 ppt positive contribution to Q3 GDP. On the other hand, there should be some scope for inventories to be rebuilt in Q1, above all given the relatively sharp drop seen in the inventories to sales ratio in Q4.
d) Trade - a whopping 1.13 ppt deduction from Net Exports had been flagged by recent Trade data, and while oil price rises were certainly a key factor in the widening of the nominal trade deficit, which are ironed out of this, the fact remains that the US should be doing far more to boost upstream processing in the sector, if it is to truly benefit from the shale oil boom, and expand its pallet / volume of energy exports.
e) Govt spending with a +0.5 ppt contribution, on a combination of defence (0.22 ppt) and State/Local (0.28 ppt) was a further positive; the outlook is however rather murky when one considers the highly divergent impact on state and municipal funding from the tax reforms.
"Take homes": Given that this is as ever subject to revisions, above all to the two items that were the key drags on headline GDP (though these could be negative revisions), the report does little to change the view that the US economy enters 2018 with solid momentum. Markets can now turn their attention to the myriad of GDP readings from Europe, Asia and Canada next week, along with Jan Eurozone CPI, US Payrolls and a bonanza week for corporate earnings, with a particular focus on ther raft of tech sector earnings (among others Alibaba, Apple, Alphabet and Amazon, Facebook, Microsoft & SAP).
Also - some thoughts on Davos aftermath:
http://www.corelondon.tv/davos-elite-deliver/
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Marc Ostwald
Global Strategist
ADM Investor Services International