Fourth-quarter U.S. GDP up just 1.4%, badly missing estimate

Key Concepts

• GDP (Gross Domestic Product): The total monetary or market value of all final goods and services produced within a country’s borders in a specific time period.
• PCE (Personal Consumption Expenditures) Price Index: A measure of the average change over time in the prices paid by consumers for goods and services. The core PCE excludes volatile food and energy prices.
• Yields (Treasury Yields): The return an investor receives on a debt security. Specifically, the 2-year and 10-year Treasury yields are referenced.
• Sequential/Rear View Mirror: Refers to the previous quarter’s data (sequential) versus the most recently reported data (rear view mirror).
• Inflation: A general increase in prices and fall in the purchasing value of money.

Economic Data Release: December Personal Income & Spending, Q4 GDP

This report details the economic data released on Friday concerning December personal income and spending, alongside the first look at fourth quarter GDP. The data reveals a mixed economic picture, with GDP growth significantly below expectations and persistent inflationary pressures.

GDP Performance – Q4 2023

The fourth quarter GDP came in at 1.4%, a substantial disappointment compared to the anticipated 2.8%. This represents the lowest GDP growth rate since the first quarter of 2023, when it was slightly negative (-0.5%). Consumption, a key driver of GDP, was reported at 2.4%, meeting expectations but representing the lowest figure since the first quarter of 2023 (6%).

Pricing Index Analysis

The pricing index presented concerning news, registering 3.6%, exceeding the expected 2.8%. While lower than the previous quarter’s 3.8%, it matches the level seen in the first quarter of 2023. The PCE core pricing index, excluding food and energy, came in at 2.7%, one tick above expectations but two ticks below the previous reading of 2.9%.

Personal Income & Spending

Personal income increased by 0.3%, aligning with expectations, and was later upgraded to 0.4%. Personal spending also rose by 0.4%, exceeding expectations by 0.1%. However, real spending, adjusted for inflation, increased by only 0.1%, matching expectations but falling short of historical trends and equaling September’s figure. A lower real spending figure was last observed in May of the previous year, when it was slightly negative.

PCE Pricing Index – Monthly & Yearly Trends

The PCE pricing index month-over-month increased by 0.4%, slightly hotter than anticipated and double the previous month’s 0.2%. This level is comparable to February 2023. Year-over-year, the PCE increased by 2.9%. The core PCE month-over-month rose by 0.4%, and year-over-year increased by 3%, marking the highest level since April of last year.

Market Reaction & Historical Context

Rick Santella notes the market “divined” that the PCE numbers would be hotter than expected, and the data confirms this. While some progress has been made on certain numbers, particularly on the GDP side, limited progress has been observed in curbing inflation.

The 2-year Treasury yield, which closed at 3.41% last Friday (the lowest since the end of 2022), is currently hovering around 3.46%. The 10-year Treasury yield, which closed at 4.05% last Friday (the lowest since the end of November 2023), is currently at 4.06%. Pre-opening equity futures indicate a downward trend, with Dow futures down over 110 points.

Notable Quote

“I think the market did a good job of divining and I would have to say that many including Steve Leeman thought this number would be hotter than expected on the PCE front and indeed it is.” – Rick Santella.

Synthesis

The released data paints a picture of slowing economic growth coupled with stubbornly persistent inflation. While personal spending remains relatively robust, the lower-than-expected GDP growth and elevated PCE figures suggest the Federal Reserve’s efforts to cool the economy and bring inflation under control are facing challenges. The market reaction, while not dramatic, reflects a cautious outlook given the data’s implications for future monetary policy.