US Economy Outperforms, Validating Hawkish Fed

The US economic expansion picked up in the fourth quarter, data out Thursday showed.

The 6.9% rate represented a pronounced acceleration from the prior quarter’s pace, and easily topped forecasts.

Consensus expected 5.5% on the headline (figure below). The range, from nearly six-dozen economists, was 4% to 8.3%.

Inventories played a big part. “The increase in real GDP primarily reflected increases in private inventory investment,” the government said.

Inventories “are expected to remain a tailwind for economic growth this year,” Bloomberg wrote, adding that when “faced with persistent supply shortages, businesses had been relying on inventories to keep up with robust merchandise demand [and] are now beginning to restock, which will help bolster production.”

The figures come at a critical juncture. Growth concerns are mounting on the eve of what’s widely expected to be an aggressive Fed tightening campaign that some critics charge is starting far too late.

Elevated inflation is weighing on consumer sentiment. Although wage gains are robust, they haven’t kept up with price increases in aggregate. Annual real wage growth was deeply negative in December, a month when retail sales plummeted.

Thursday’s GDP data showed personal consumption rose 3.3% in Q4 (figure below). That was just short of the expected 3.4% gain.

That’s marginally disappointing, and may add to concerns about the resiliency of the economy as the Fed embarks on what some have already decided is an ill-fated journey to normalize monetary policy.

That’s unlikely to be anyone’s takeaway, though. The Fed is predisposed to viewing any weakness in consumption as linked to Omicron and therefore not particularly relevant for policy. A mostly in-line, backward-looking consumption print is probably immaterial at this point.

Friday’s PCE data for December will give the market a more granular look at the consumer. Shortly thereafter, investors will get the final read on the University of Michigan’s sentiment gauge for this month.

Nonresidential fixed investment rose 2% in Q4. I’ll call it “steady” (figure below), although “subdued” might be a better adjective.

Notably, the pace of final sales to private domestic purchasers doubled from Q3, to 2.8%. Government spending slumped across the board, falling at the federal, state and local levels.

The surge in the price index (6.9%) was far more acute than expected. Consensus was looking for 6%. Core PCE was in line at 4.9%, up from 4.6% in Q3.

All in all, the advance read on GDP will likely be seen as validating the Fed’s hawkish turn.

On one hand, you could argue the optically solid read on the economy suggests growth is stable enough to support rate hikes, and therefore risk assets should cheer the headline beat.

On the other hand, you could simply suggest that good news is unequivocally “bad” at this juncture, considering the read through for policymakers on the brink of panicking in the face of the highest inflation since Jerome Powell was 29 years old.

Speak your mind

This site uses Akismet to reduce spam. Learn how your comment data is processed.

7 thoughts on “US Economy Outperforms, Validating Hawkish Fed

  1. We are still in a market that is coming back to a reboot. Inventory rebuilding was the big story. That is not a sustainable source of growth. The underlying economic structure is in the process of adjusting- you can bet the idea of just in time inventory management is being changed to something that is more resilient. It will be interesting to see what happens when the prop of government spending is reduced and monetary policy is “adjusted”. No recession now, but 2023 may be in play. Policy error is a significant risk.

  2. Speculating that Fed may want aggressive tightening in early 2022, when inventory rebuild, excess savings, state govt surpluses, labor shortage, other factors are still tailwinds. While they are, in practice, limited in how much they can actually execute in 1H, they can magnify the impact by frontloading hawkish communication, so the market executes for them. It seems they expect pandemic and supply chain improvement effects to come in and help in 2H.

  3. I still have trouble understand how even the Fed keeps pointing at strong consumer balance sheets. Shouldn’t they be called “Individual” balance sheets rather than “consumer” balance sheets since the excess savings they keep pointing at are mostly in the hands of people who will not spend it?

    1. Inequality is a crafty bitch, or, so it seems. Once it bestows it’s blessings the captivated host becomes it’s unwitting propagator. The process has many variations and outcomes, but, most of them are fairly well covered here,

      Not to worry though, the Quants are pretty sure YTD economic/market performance is just a small matter of the system being displaced from its equilibrium condition and it just needs to be allowed to respond to the forces that tend to restore equilibrium. So don’t mind the vibrations. That’s why they put seatbelts in orbital launch vehicles. Note, seatbelts serve a rather different function in cars.

  4. Hopefully. under the radar, US is making immigration available to some Taiwanese people (and their wealth). Long term/big picture, growth in the US economy depends on births and immigration.

NEWSROOM crewneck & prints