Heisenberg Report

GDP Beats, But Consumption Slows Sharply, Business Investment Falls Third Straight Quarter

The US economy grew an annualized 2.1% during the fourth quarter, a touch better than expectations, and in line with Q3’s clip.

Recent data (sans ISM manufacturing, which continues to march to its own, dour drum beat) has generally pointed to economic resilience in the face of myriad headwinds, including the drag from the trade war, which has weighed on C-suite confidence to the detriment of business spending.

Obviously, growth isn’t running anywhere near the lofty promises made by Donald Trump on the campaign trail, where he repeatedly suggested it was possible to engineer emerging market-like gains in the US, something Janet Yellen reportedly warned him was not feasible. And yet, the president has found no shortage of scapegoats. In Davos last week, he blamed Boeing, hurricanes and the Fed (among other real and imagined antagonists) for his inability to deliver on his headline GDP pledges.

Stripped of normative concerns about the extent to which the tax cuts turbocharged corporate profits and buybacks thereby delivering windfalls to the wealthy that far outstrip wage gains for everyday workers (remember, “wealth” creation is something far, far different from “wage gains”), there’s nothing “wrong” with Trump’s economic record. The economy is strong and, in some respects, it actually is the envy of the world, as the president insists.

The problem is, Trump’s bombast bears no resemblance whatsoever to reality. He told Davos this month that the White House is responsible for “a boom the likes of which the world has never seen”, a boast so outlandish it was barely worth mocking. The reality is that Trump’s economy is good, but that’s as far as it goes.

Arguably, Trump’s greatest economic achievement over the past 18 months is keeping the consumer happy (and thereby “in the game”, so to speak) amid wholly unpredictable trade policy turns and what can only be described as schizophrenic behavior in the face of external security threats.

Despite the trade war and signs that the US may be hurtling towards a shooting war with Iran, personal consumption rose 4.6% in the second quarter and 3.2% in the third. That performance helped cushion the blow from two consecutive quarters of falling business investment.

In the fourth quarter, personal consumption rose just 1.8%. Economists had forecast a 2% gain. This is the softest read since Q1 2019.

Nonresidential fixed investment fell 1.5% in Q4, better than Q3, but still foreboding. It was the third straight quarter of declines, and although the trade deal may help bolster CEO confidence going forward, the Wuhan virus outbreak may unfortunately serve as an offsetting drag.

This is the first time since 2009 that nonresidential fixed investment has fallen in three consecutive periods.

Final sales to domestic purchasers ex.-government purchases gained a meager 1.4%, the least in four years.

Meanwhile, the headline number belies the contribution of plunging imports, which is obviously not a sign of robust demand.

The contribution from net exports was 1.48 percentage points. That is the most since 2009.

Oh, and finally, the YoY GDP print for 2019 is 2.3%. So, let’s just call Trump’s 3% “goal” or “target” missed. And he’s not going to hit it in 2020 either. That’s not necessarily to speak ill of his policies, it’s just a realistic assessment.

But don’t worry, Trump will find someone to blame. In some cases, he’ll be right (the Fed did overtighten in 2018). In many cases, he’ll be wrong.

A word of caution to the mercurial president in an election year, though: If consumption ever falters in earnest, publicly scapegoating the US consumer isn’t generally a good idea. After all, those are the voters.