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4Q ’23 GDP is Excellent – Sort of…

The first estimate of 4Q GDP came out this morning. Growth of 3.3% was well above expectations of 2%. As usual, we’ll go through a couple of adjustments. DKI adjusts for change in private inventories because it reflects inventory stocking or de-stocking as opposed to actual economic activity. 4Q inventory additions were only .07% which is negligible. This is consistent with recent mixed economic data. Despite high levels of consumer spending, businesses do not want to carry more inventory. The consumer might be spending huge amounts, but as we’ve pointed out recently, manufacturers are reducing production in anticipation of a slowdown/recession.

It’s a lot better than most of us had feared.


The price index for gross domestic purchase was up 1.9% for the quarter. The reason for that adjustment is because price increases don’t represent an increase in economic activity. Imagine you buy a loaf of bread for $1 today. Now, imagine you buy another identical loaf of bread next year for $2. You’ve spent twice as much, but the economic activity (1 loaf of bread) is unchanged. While acknowledging that inflation has come down from its 2022 highs, I’m skeptical on that 1.9% number. Granted, auto prices are coming down from insane highs, shelter (housing) is no longer getting more expensive, and fuel prices are down from prior peaks. Still, if your household expenses are up ONLY 1.9% from a year ago, I’d love to hear from you.


With understated inflation, it’s likely that the actual increase in GDP was positive, but something less than 3.3%. Whether GDP was up 2% or more than 3%, it was a decent quarter and much better than any of us would have predicted a year ago. Two mitigating factors jump out to me. First, GDP includes government spending regardless of whether it creates any value or not. For the past few Presidential administrations, we’ve only had huge increases in spending. Much of the Covid-related excess spending has now become part of the baseline in Washington DC, and the US is now running yearly multi-trillion-dollar deficits. That big GDP number the market is celebrating this morning was largely created by pulling forward consumption demand. Eventually, the bill will come due. Printing money doesn’t create value:  It just changes the timing of when people consume.


The second thing that I’d point out is the US consumer is seeing bailouts and spending for all kinds of companies and causes. While I personally would discourage taking on lots of debt in the hope that you’ll get bailed out as well, it’s easy to understand how people who see constant bailouts and giveaways are not inclined to save. We’re seeing increasing use of buy now pay later offers including on restaurant meals. The consumer is largely employed and making more, but it’s not clear to me that this level of spending is sustainable.


Today’s strong GDP print makes it less likely that the Federal Reserve lowers interest rates at the next meeting, and also, gives strength to the arguments being made by those saying we’re heading for a “soft landing”; a reduction of inflation without a recession. if you have any questions.


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