Thursday, January 30, 2020

Mixed signals in Q4 2019 GDP

 - by New Deal democrat

This morning’s Q4 2019 GDP gave us mixed signals. As per my usual practice, I am less interested in what happened in the rear view mirror, which was an annualized gain of +2.1%, than what the number tells us about what lies ahead.

The two forward-looking components of GDP are (1) private fixed residential investment, and (2) corporate profits. Both of these are long leading indicators, i.e., giving us an idea about where the overall economy will be a year or more out from here.

In that regard, the news was mixed.

Private residential fixed investment increased +1.4% q/q. This is in keeping with the rebound in housing construction that we have seen in the monthly data since last spring. Note that residential investment as a share of GDP increased in both nominal (blue) and real (red) terms:

Meanwhile, while corporate profits won’t be reported until the final revision in GDP two months from now, proprietors’ income was. While it does not always move in the same direction as corporate profits, and sometimes lags, it a good placeholder.  Here the news was negative, as nominally proprietors’ income rose a mere +0.2% q/q:

Since the GDP price deflator rose +0.4% during the quarter, the “real” measure declined slightly.

In sum, one long leading indicators increased, and one decreased. So, while
 in the rear view mirror, there was no recession in Q4 2019, there is more evidence of at best a stall in the producer side of the economy.