Q4 GDP Reinforces “Solid” Storyline

This morning, GDP was revised lower from a 3.3% gain to a 3.2% increase on an annualized basis in the second-round Q4 report. According to the median forecast, activity October to December was expected to be unrevised at a 3.3% gain.

In the details of the report, personal consumption was revised higher from a 2.8% rise to a 3.0% gain in the second-round Q4 report.

Goods consumption, meanwhile, was revised lower from a 3.8% rise to a 3.2% gain, due to downward revisions in both durables consumption from a 4.6% gain to a 3.2% rise, and nondurables consumption from a 3.4% increase to a 3.3% gain.

Services consumption, on the other hand, was revised higher from a 2.4% rise to a 2.8% increase in the second-round Q4 report, the largest gain in three quarters.

Gross private investment, a gauge of business spending, was revised down from a 2.1% rise to a 0.9% increase, a three-quarter low.

Fixed investment was revised up from a 1.7% gain to a larger 2.5% increase in the second-round Q4 report, down from a 2.6% gain in Q3.

Nonresidential investment, including office buildings and factories, was revised up from a 1.9% gain to a 2.4% increase, due to upward revisions in structures investment from a  3.2% gain to a 7.5% increase, and in intellectual property investment from a 2.1% rise to a 3.3% increase. Equipment investment, however, was revised down from a 1.0% gain to a 1.7% drop in the second-round Q4 print.

Residential investment was revised up from a 1.1% gain to a 2.9% rise, the second consecutive quarterly increase following nine consecutive quarters of decline.

On the trade side, exports were revised up a tenth of a percentage point to a 6.4% increase, the largest quarterly gain since Q1 2023, and imports were revised higher from a 1.9% rise to a 2.7% increase.

Finally, government consumption was revised up from a 3.3% gain to a 4.2% rise. Federal spending was revised down two-tenths of a percentage point to a 2.3% gain, national defense spending was revised lower from a 0.9% rise to a 0.4% increase, while state and local spending was revised up from a 3.7% gain to a 5.4% rise in the second-round Q4 report.

Bottom Line: The minimal revision to fourth-quarter GDP underscores the ongoing storyline of a strong economy and resilient consumer as we turned the page into 2024. That being said, momentum clearly slowed from an outsized rise of near 5% in the third quarter into year-end. Furthermore, looking ahead, amid the weight of higher prices, higher borrowing costs, the resumption of student debt payments, consumption – the backbone of the economy – will continue to face fatigue, resulting in an additional second-derivative decline for topline growth, likely resulting in an average 2%-ish pace across the next 12 months.

While still positive and likely avoiding an outright decline in the near term, the bigger question remains, where do we go from here? Looking out to 2025, a further loss of momentum into a non-accelerating pace of expansion, coupled with still-elevated or sticky inflation, could leave the economy in a precarious position, or at least vulnerable to a scenario of a stagflation environment. 

Also this morning, MBA mortgage applications fell 5.6% in the week ending February 23 following a 10.6% decline the week prior. The 30-year mortgage rate, meanwhile, fell 2bps to 7.04%, still near the highest since the start of December.

Yesterday, durable goods orders fell 6.1% in January, more than the 5.0% decline expected and the largest monthly drop since April 2020. Year-over-year, headline orders fell 0.6% in January, the first annual decline since August 2020.

Transportation orders fell 16.2% following a 0.6% decline the month prior, due to a 58.9% drop in civilian aircraft orders and a 0.4% decrease in vehicle and parts orders. Excluding transportation, durable goods orders fell 0.3% in January, and increased 1.1% over the past 12 months, down from the 1.7% annual increase in December.

Capital goods orders fell 15.0% in January. Nondefense capital goods orders, meanwhile, plunged 19.4% following a 0.1% increase in December. Capital goods orders excluding aircraft and defense – a proxy for business investment – rose 0.1% in January following a 0.6% decrease the month prior. Year-over-year, business investment increased 0.1%, down from the 0.9% annual gain in December.

In other details, computers and electronics orders increased 1.4%, and electrical equipment orders rose 0.9% in January. On the other hand, machinery orders were flat (0.0%), fabricated metals orders declined 0.9%, and primary metals orders fell 1.7% in the first month of 2024.

Bottom Line: A minimal rise in core capital orders, a proxy for businesses investment, suggests companies may be increasingly feeling the weight of higher prices and borrowing costs. Additionally, amid a still positive but an uncertain outlook, potentially including a government shutdown, businesses appear somewhat hesitant, potentially restraining investment near term. 

Also yesterday, the FHFA House Price Index rose 0.1% in December, falling short of the 0.3% increase expected.

The S&P Case-Shiller 20 City Home Price Index rose 0.21% in December, in line with the 0.20% expected gain and following a 0.24% increase in November. The National Home Price Index, meanwhile, rose 0.19% in December following a 0.25% increase in November. Over the past 12 months, the 20-city index rose 6.18%, the largest annual gain since November 2022, and the national index increased 5.57%, marking its largest annual gain since December 2022.

Additionally yesterday, consumer confidence, according to the Conference Board, unexpectedly fell from 110.9, revised lower from 114.8, to a reading of 106.7 in February, a three-month low. According to the median forecast, consumer confidence was expected to rise to 115.0. In the details of the report, a gauge of current conditions decreased from 154.9 to 147.2, a two-month low, and a gauge of future expectations fell from 81.5 to 79.8 in February, also a two-month low.

Bottom Line: Similar to businesses curtailing investment amid a still positive but uncertain outlook for the economy as well as monetary and fiscal policy, consumers are growing less confident. Still relatively optimistic, the weight of current elevated prices as well as future unknowns are weighing on confidence.   

Finally, yesterday, the Richmond Fed Manufacturing Index rose ten points to a reading of -5 in February, the highest reading in three months. According to the median forecast, the index was expected to rise to a reading of -9. In the details of the report, shipments remained at a reading of -15 for the second consecutive month, while new order volume rose from -16 to -5, and the number of employees jumped from -15 to +7, a four-month high. Also, capacity utilization increased from -27 to -4, and order backlogs gained eight points to a reading of -15 in February. 

Tomorrow, policy officials will get another data point on prices with the January PCE, the preferred measure of inflation. According to the consensus, the PCE is expected to rise 0.3% in January following a 0.2% gain in December and potentially rising 2.4% over the past 12 months, which would mark a decline from the 2.6% increase in December.

The core PCE, on the other hand, is expected to increase 0.4% in January after a 0.2% rise in December and gain 2.8% year-over-year, potentially marking a minimal one tenth of a percentage point decline from the December pace of 2.9% and hardly the robust decline needed to convince the Committee now is the time to initiate a reduction in rates. 

Also tomorrow, along with the PCE report, the latest look at the consumer with the January income and consumption report. Topline consumption is expected to increase 0.2% in January and 4.4% over the past 12 months, down from a 5.9% pace in December. Meanwhile, personal income is expected to rise 0.5% in January and 4.2% year-over-year, down from the 4.7% gain the month prior.

Additionally, tomorrow, the Kansas City Fed Manufacturing Activity Index will be released ahead of the final February S&P Global U.S. Manufacturing PMI print on Friday and the February ISM Manufacturing Index. While manufacturing activity rose two points at the start of the year, more broadly, activity in the manufacturing sector remains lackluster. In fact, in February, manufacturing activity is expected to tick up only slightly from 49.1 to 49.5, potentially marking the 16th consecutive month in contractionary territory, or below a reading of 50. 

Wrapping up the week, January construction spending, along with consumer sentiment from the University of Michigan, and total vehicle sales. 

-Lindsey Piegza, Ph.D., Chief Economist