by Bill McBride on 1/30/2013 10:01:00 AM
Wednesday, January 30, 2013
The Q4 GDP report was negative, with a 0.1% annualized decline in real GDP, and lower than the expected 1.0% annualized increase. Final demand increased in Q4 as personal consumption expenditures (PCE) increased at a 2.2% annual rate (up from 1.6% in Q3), and residential investment increased at a 15.3% annual rate (up from 13.5% in Q3).
Investment in equipment and software rebounded in Q4 (increased at 12.4% annualized rate), and investment in non-residential structures was slightly negative.
The slight decline in GDP was related to changes in private inventories (subtracted 1.27 percentage points), less Federal Government spending (subtracted 1.25 percentage points), and a negative contribution from trade (subtracted 0.25 percentage points).
Overall this was a weak report, but with some underlying positives (the increase in PCE and private fixed investment). I expect the payroll tax increase to slow PCE growth in the first half of 2013 - and for additional government austerity - but I think the economy will continue to grow this year.
The following graph shows the contribution to GDP from residential investment, equipment and software, and nonresidential structures (3 quarter centered average). This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.
For the following graph, red is residential, green is equipment and software, and blue is investment in non-residential structures. So the usual pattern - both into and out of recessions is - red, green, blue.
The dashed gray line is the contribution from the change in private inventories.
Click on graph for larger image.
Residential Investment (RI) made a positive contribution to GDP in Q4 for the seventh consecutive quarter. Usually residential investment leads the economy, but that didn't happen this time because of the huge overhang of existing inventory, but now RI is contributing. The good news: Residential investment has clearly bottomed.
The contribution from RI will probably continue to be sluggish compared to previous recoveries, but the ongoing positive contribution to GDP is a significant story.
Equipment and software investment increased solidly in Q4, after decreasing in Q3. This followed twelve consecutive quarters with a positive contribution.
The contribution from nonresidential investment in structures was slightly negative in Q4. Nonresidential investment in structures typically lags the recovery, however investment in energy and power has masked the ongoing weakness in office, mall and hotel investment (the underlying details will be released next week).
The second graph shows the contribution to percent change in GDP for residential investment and state and local governments since 2005.
The blue bars are for residential investment (RI), and RI was a significant drag on GDP for several years. Now RI has added to GDP growth for the last 7 quarters (through Q4 2012).
However the drag from state and local governments is ongoing, although the drag in Q4 was small. Although not as large a negative as the worst of the housing bust (and much smaller spillover effects), this decline in state and local government spending has been relentless and unprecedented. The good news is the drag appears to be ending.
Residential Investment as a percent of GDP is up from the record lows during the housing bust. Usually RI bounces back quickly following a recession, but this time there is a wide bottom because of the excess supply of existing vacant housing units.
In 2011, the increase in RI was mostly from multifamily and home improvement investment. Now the increase is from most categories including single family. I'll break down Residential Investment (RI) into components after the GDP details are released this coming week. Note: Residential investment (RI) includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories.
The last graph shows non-residential investment in structures and equipment and software.
I'll add details for investment in offices, malls and hotels next week.
The key story is that residential investment is continuing to increase, and I expect this to continue. Since RI is the best leading indicator for the economy, this suggests no recession this year or in 2014 (with the usual caveats about Europe and policy errors in the US).