You know that bearish sentiment has become passé when the US prints the best quarter for GDP in the last year and a half, and folks are talking it down because it missed forecasts (2.8% SAAR v. mkt 3% SAAR). The main reason that folks are criticising the number is that final sales (GDP less inventories) were a weak 0.8% SAAR, owing to the fact that inventory accumulation added ~200bps to the headline number.
The above chart tells the story – the blue inventory bar is big, and the GDP bar is not much bigger. However, this analysis is too simplistic – there are other interesting stories that are also worth telling.
Without buying into the Ricardian Equivalence / Stimulus debate too much – my view: the Government can alter the utilisation of resources in the short run, but only the allocation of resources in the long run; and because the Government is generally less efficient than the private sector, more Govt generally means lower real incomes – it’s worth noting that the weakness basically comes from a drop in Govt spending, and that for the private sector this is a quarter of robust growth (PCE + Pr Inv was +1.9% SAAR).
Looked at this way, this is the best quality quarter of US growth in some time!
Look at the sustained strength in Personal Consumption Expenditures (PCE).
Excepting Q2 (which was depressed by a fuel tax) consumption has been adding ~150bps per quarter to headline growth (which equates to growth of ~2% SAAR per quarter). What is more impressive is that durable goods (typically the most cyclical component) contributed ~110bps to the PCE result. The weaker pulse of PCE inflation (-160bps to +0.7% SAAR) suggests real income formation should support ongoing consumption growth at around this level.
While the weakness in Q4 Private Investment (contributing +41bps to GDP) is unwelcome, it’s worth paying close attention to the big increase in residential investment (+11% SAAR, contributing 23bps). The reason: housing is the business cycle . As Ed Leamer shows in the linked paper, housing generally causes recession, and robust recoveries without housing are uncommon.
So with residential investment now picking up, and potentially beginning to expand as a proportion of GDP, history suggests that US GDP growth is likely to accelerate over the course of 2012.
p.s. my pick of the recent Ricardian Equivalence blogs by the big gun economist bloggers is John Cochrane’s recent post