Economists React to the Fourth-Quarter GDP Report: ‘Less Than Meets the Eye’

The U.S. economy expanded at a 1% rate in the final three months of 2015, better than a previously reported 0.7% gain, the Commerce Department said Friday. Here’s what economists had to say.

“In short, the details of the upward revision to GDP were negative, with inventories less of a drag than before. That probably means more of a drag going forward at some point. Overall, though, the report is unlikely to affect forecasts significantly. Data available so far for the first quarter suggest a pickup from the 1.0% overall pace, even if inventories are still a bit of a drag. Our first quarter forecast is for a 2.3% pace.” —Jim O’Sullivan, High Frequency Economics

“The net trade deficit was…reduced, resulting in that segment of the economy subtracting less from growth than previously estimated, -0.25 percentage points versus the prior estimate of -0.47 percentage points. On the other hand, the estimate for consumption activity was lowered to 2.0% from 2.2%, suggesting a weaker-than-expected showing in this key segment of the economy than previously thought…..Overall, despite the better than expected headline print, the underlying tone of this report was less than meets the eye…The downgrade in consumption activity speaks to a softening in a key component of GDP and the sharp upward revision to inventories will result in a weak handoff to first-quarter GDP tracking.” —Millan Mulraine, TD Securities

“The upward revision to equipment investment was also notable. This component was revised to -1.8% from a very weak -2.5% in the advance report. With the energy sector still struggling, a significant rebound in equipment investment still may be several quarters away.” —Dana Saporta, Credit Suisse

“In sum, real final demand turned out to be marginally weaker than the preliminary print. The subpar 1.4% gain in real domestic demand, however, likely will not be repeated, as consumer spending is likely to bounce back in first quarter.…The [Bureau of Economic Analysis] incorporated benchmark data on wages and salaries for the third quarter into its income estimates. This resulted in a downward revision of about $26 billion to the quarterly gain in wage and salary income, though the annualized advance for the period was still a solid 3.2%. The fourth quarter gain was similarly shaved from a 3.2% pace to a 2.5% clip. As a result, the savings rate for the fourth quarter was revised down from 5.4% to 5.1%.” —Stephen Stanley, Amherst Pierpont Securities

“Consumer spending in the fourth quarter was revised lower, to 2.0% annualized growth, from 2.2% growth in the advance estimate. This is still a solid number, however, and consumer spending will continue to lead economic growth in 2016. Warmer-than-usual weather in much of the country depressed spending on utilities in late 2015, and that should change in the first quarter of this year with a return to more seasonable weather, providing a boost to consumer spending.” —Gus Faucher, PNC

“While the upward revision to headline GDP growth is better than nothing, particularly as the consensus forecast was for a downward revision to 0.4%, the bottom line is that fourth-quarter GDP growth was still pretty modest. Furthermore, the weaker drag from inventories in the fourth quarter means that any rebound in the first quarter could be slightly more modest than we previously expected. Nevertheless, it still appears that first-quarter GDP growth is on track to rebound to a very healthy 2.5% annualized or higher, which should dampen any concerns about an imminent recession.” —Paul Ashworth, Capital Economics

“Core PCE inflation increased 1.3% on a quarterly annualized basis and 1.4% in year over year terms. Despite the upside surprise to the topline number, weaker consumption and more inventories is not the construct of growth that the Fed would like to see. Nevertheless, real incomes remained quite firm through fourth quarter and we expect first quarter to be decent. We expect a print close to 2.0% quarter over quarter seasonally adjusted annual rate for first quarter GDP.” —Bricklin Dwyer, BNP Paribas

“All the revision was in the inventory and imports component, with everything else—consumption, fixed investment, government spending and exports—revised down modestly….The bottom line here is that while this revision is welcome, it does not help answer the key questions for growth this year, namely, when will oil sector capex stop falling, and will the personal-saving rate mean-revert, boosting spending?” —Ian Shepherdson, Pantheon Macroeconomics

“Residential investment growth was revised lower to 7.9%, but still contributed a strong 0.3 percentage points to growth. Overall, the residential sector should maintain its gradual momentum into 2016 supported by generally affordable conditions and strong economic fundamentals. Business investment shrank 1.9% due to a downwardly revised 6.6% contraction and 1.8% decline in equipment spending. The outlook for business spending remains fairly downbeat as the strong dollar, depressed global growth and low energy prices represent significant headwinds.” —Gregory Daco, Oxford Economics

Source: The Wall Street Journal

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