Why Weak GDP and Weak Durable Goods Should Not Matter, at Least This Time Around
The only way to describe Friday’s key economic reports would be disappointing. The durable goods reading for December was soft, and the first-quarter look at fourth-quarter gross domestic product (GDP) was significantly softer than you might have hoped for in the wake of the post-election rally.
While these reports might give some of the economic policy critics more fodder, the reality is that many of the policies that were promised during the election will not actually start showing up until later in the 2017 and into the 2018 readings. And that assumes that they will actually succeed in Congress.
It would be easy to feel discouraged with two very disappointing numbers on such large and important economic numbers. After all, GDP is how we measure the U.S. economy. That being said, the real issue for growth is what can emerge from aggressive proposals into solid pro-growth policy. The Dow Jones Industrial Average has now hit 20,000, at the same time that the S&P 500 and the Nasdaq have hit all-times as well. The view of 24/7 Wall St. is that there remains a clear path to Dow 21,244 in 2017.
When traders and economic watchers saw a 1.9% preliminary GDP gain, they were expecting to see a 2.2 gain, according to Bloomberg’s consensus reading. The price index, the inflationary component, was up 2.1%, and that matched the consensus estimate.
GDP was influenced by several issues. An unwanted and undesirable buildup of inventories helped to juice the number higher, adding a full percentage point. The gain in final demand was only 0.9%, versus a 3.0% gain in the prior quarter.
Other positives and negatives within GDP were as follows:
- Personal consumption expenditures were up 2.5% (down from 3.0% in the prior quarter).
- Strong auto sales and residential investment were positive.
- Business investment was positive, for the third quarterly consecutive gain.
- Net exports were a big drag here, taking away 1.7 points from the fourth quarter.
Real GDP increased 1.6% in 2016, versus an increase of 2.6% in 2015. This figure for 2016 will be adjusted in the next two revisions, and the Bureau of Economic Analysis described the annual GDP strengths and weaknesses as follows:
The increase in real GDP in 2016 reflected positive contributions from PCE, residential fixed investment, state and local government spending, exports, and federal government spending that were partly offset by negative contributions from private inventory investment and nonresidential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.
The deceleration in real GDP from 2015 to 2016 reflected a downturn in private inventory investment, a deceleration in PCE, a downturn in nonresidential fixed investment, and decelerations in residential fixed investment and in state and local government spending that were offset by a deceleration in imports and accelerations in federal government spending and in exports.
The current-dollar GDP rose by 2.9% ($530.3 billion) in 2016 to a level of $18.5669 trillion, compared with an increase of 3.7%, or $643.5 billion, in 2015.
On durable goods, the U.S. Department of Commerce showed that the headline report for new orders was down 0.4% in December, compared with a Bloomberg consensus estimate of 2.6%. Even though there is a simple explanation, and even knowing that this headline number is volatile in good times and bad, that’s a shocker on the surface. If you back out transportation, the gain of 0.5% met expectations.
On a year-over-year basis, new orders were up 1.6% on the broad headline reading, and new orders were up 3.5%, if you back out transportation. Now we are looking better.
The real issue here is civilian aircraft, but there was also a massive drop in defense aircraft orders. There was strength seen in the capital goods reading, which is the nondefense excluding aircraft, where the core orders rose 0.8% on the monthly reading and rose by 2.8% from a year earlier.
This gain only confirms an increase in business spending and business investing that should act as a solid starting basis for the first quarter of 2017.