To The Moon

The latest US GDP (QoQ) Q4 beat the estimate of 2.6% and came up at 2.9%.

Yahoo News reports on the US economy - strong growth in Q4

Source: https://sg.news.yahoo.com/u-economy-posts-strong-growth-162211186.html

The following is a breakdown of contribution to GDP (source: Bloomberg)

GDP contribution by category (Source: Bloomberg)

TradingView - heatmap of S&P500 as of 27Jan2023 8am SGT

As per the above, the market has responded positively to the news with S&P500 ending the day with a 1.10% gain at 4,060.43 as per market closing on 26 Jan 2023.

In the past weeks, we have heard from various sources expecting a recession in the coming months. Is the recession still coming? Will we get the soft landing that we hope for? Let us go into the details of the latest GDP figure.

Deep dive into the GDP figures

From BEA website:

The increase in real GDP reflected increases in private inventory investment, consumer spending, federal government spending, state and local government spending, and nonresidential fixed investment that were partly offset by decreases in residential fixed investment and exports. Imports, which are a subtraction in the calculation of GDP, decreased

Current-dollar GDP increased 9.2 percent, or $2.15 trillion, in 2022 to a level of $25.46 trillion, compared with an increase of 10.7 percent, or $2.25 trillion, in 2021.

The price index for gross domestic purchases increased 6.8 percent in 2022, compared with an increase of 4.2 percent in 2021 (table 4). The PCE price index increased 6.2 percent, compared with an increase of 4.0 percent. Excluding food and energy prices, the PCE price index increased 5.0 percent, compared with an increase of 3.5 percent.

Source: https://www.bea.gov/data/gdp/gross-domestic-product

Real GDP by Quarters (Source: BEA)

Here are my observations for the 2.9% real GDP growth:

• GDP (2.9%) is made up of the following:

1. Personal consumption expenditure (up 2.1%)
2. Gross private domestic investment (up 1.4%)
3. Net exports of good sand services (export down by 1.3% and import down by 4.6%)
4. Government consumption expenditure and gross investment (up 3.7%)

• It is fueled by a 2.1% increase in personal consumption expenditures. Personal Consumption is made up of goods and services.
• Services grew by 2.6%
• Goods grew by 1.1%. This is partly fueled by the seasonal year-end shopping during Black Friday, Cyber Monday, Thanksgiving and Christmas. Such a peak should not occur again till the Q4 of 2023 and probably at a different magnitude. From Thanksgiving, Black Friday and Cyber Monday, the US experienced an estimated sale of $25.72B (excluding Christmas sales).

The notable shopping events where record sales were recorded.

Cyber Monday online sales hit a record $11.3B, driven by demand, not just inflation, says Adobe

(Source: https://techcrunch.com/2022/11/29/cyber-monday-online-sales/).

Photo taken from the Techcrunch news article (https://techcrunch.com/2022/11/25/thanksgiving-black-friday-online-sales-figures/)

Black Friday 2022 e-commerce reaches record $9.12B, Thanksgiving $5.3B; BNPL and mobile are big hits

(Source: https://techcrunch.com/2022/11/25/thanksgiving-black-friday-online-sales-figures/)

• Gross private domestic investmentgrew by 1.4%. This comprises 2 portions - “fixed investment” and “change in private inventory”.
• Fixed Investment is down by 6.7%. (Fixed investment is made up of non-residential and residential.)
• Nonresidential (Fixed investment) is up 0.7%. This comprises structures (up 0.4%), equipment (down 3.7%) and intellectual property products (up 5.3%).
• Residential (Fixed investment) is down significantly by 26.7%
• Thus, “nonresidential” has a heavier weightage/magnitude than “residential”.
• Change in private inventory - no figure is provided in table 1 above.
• How can gross private domestic investment grow by 1.4% if “Fixed investment” is down by 6.7% and the other component “change in private inventory” has no data? Let us explore other data tables later.

• Net export of goods and services (this is obtained when we minus imports from exports):
• Exports are down by 1.3%. Goods are down 7.0% and services are up by 12.4%.
• Imports (for domestic US consumption) are down by 4.6%. Goods are down by 5.6% but services are up by 0.4%.
• There are red flags in this as US consumption (from import) is down for goods but on a slight increase for service. There is a reduction in US domestic consumption for imports. Interestingly, this drop in imports took place in Q4 when there are notable shopping events in the US.
• Does this mean that US consumers have turned more to local products? There were some changes in procurement where people have chosen to import goods earlier to avoid the usual holiday peak and the port congestion along the West Coast of the US. However, import goods were down by 0.4% & 8.6% in Q2 & Q3 of 2022 respectively.
• US export (consumed by countries outside of the US) is down by 7.0%. This is not good news for US local producers and manufacturers.

• The last category is Government consumption expenditures and gross investment ticked upwards at 3.7%. This comprises government consumption and investments at both “Federal” and “State & local” levels.
• Federal government consumption and investment grew by 6.2%. This is made up of nondefense and National defense components.
• National defense grew by 2.4% QoQ
• Nondefense grew by 11.2% QoQ
• State & local grew by 2.3% QoQ.

Contributions to Real GDP

From the table above, we have a better picture of how each component contributed to the 2.9% GDP increase:

• Personal consumption expenditure (1.42% out of 2.9%)

BEA: The increase in consumer spending reflected increases in both services and goods. Within services, the increase was led by health care, housing and utilities, and "other" services (notably, personal care services). Within goods, the leading contributor was motor vehicles and parts.

• Gross private domestic investment (0.27% out of 2.9%)
• Net exports of goods and services (0.56% out of 2.9%)
• Government consumption expenditure and gross investment (0.64% out of 2.9%)

BEA: Within federal government spending, the increase was led by nondefense spending. The increase in state and local government spending primarily reflected an increase in compensation of state and local government employees. Within nonresidential fixed investment, an increase in intellectual property products was partly offset by a decrease in equipment.

• all these summed up to give us the 2.9% GDP growth

Other observations:

• Personal consumption expenditure - services alone contributed 1.16% out of the 2.9% GDP growth.
• Since Q2 of 2021, residential (fixed investment) from gross private domestic investment) has been in decline. In fact, it is one of the biggest declines.
• The change in (non-farm) private inventory (under gross private domestic investment) is also a big reason for the GDP growth.

BEA: This is the extract from BEA explaining the impact of change in private inventory:

The increase in private inventory investment was led by manufacturing (mainly petroleum and coal products as well as chemicals) as well as mining, utilities, and construction industries (led by utilities).

• Federal spending is also driving GDP growth, contributing about 0.64% of the 2.9% GDP growth, accounting for a strong 22%.

Personal Income and Disposition

Observations:

• There is a trend of increasing disposable personal income in 2022.
• While personal savings has increased ($552.9B in Q4 compared to Q3’s $507.7B), there is a worrying trend of declining personal saving (as a percentage of disposable personal income). The annualized personal saving (as a percentage of disposable personal income) has fallen from 17.0% (2020), to 12.0% (2021) and finally to 3.3% (2022). Should the trend persist, we may see negative personal savings in 2023.
• Personal income (annual) has been increasing since 2020.
• The notable (annual) decline is found in the “personal current transfer receipt” from $4.6T (2021) to $3.9T (2022).

BEA definition of “Personal current transfer receipt”

Consists of income payments topersonsfor which no currentservicesare performed and net insurance settlements. It is the sum ofgovernment social benefitsand netcurrent transfer receiptsfrom business.

Conclusion

US and UK economies are largely driven by consumption. Source: World Bank / Financial Times

The US economy is primarily driven by consumption. Following the year-end sales, Q1/2023 GDP will offer a more normalized outlook for the coming quarters. With the series of layoffs, there would be disposable income reduction and a tightening of spending. We should also see an outflow of talent (leaving the US) should they fail to secure new employment.

There are concerns coming from US production, export and private domestic investments. While we see annual gains in personal income, there is a worrying trend in the drop in personal savings over the last 3 years. As a whole, the drastic drop in personal savings from 17% in 2020 to 3.3% in 2022 would be a case of concern. As the data represent the US as a whole, the impact on different income brackets and demographics would likely differ. The income distribution is likely to be uneven.

With this good GDP figure (2.9% growth) and favourable initial jobless claims of 188K, the Fed can remain its hawkish stand towards inflation. Would the Fed go for a 50 bps interest rate hike instead of the expected 25 to take on the inflation beast? I recommend caution for the coming months as we foresee more headwinds.

@TigerStars