March 26, 2020

The preliminary, revised, and final estimates of fourth quarter GDP growth all came in at 2.1% which was identical to the 2.1% pace registered in the third quarter.  We  continue to expect GDP growth of 2.4% this year.

Final sales, which is GDP excluding the change in business inventories rose 3.1% in the fourth quarter compared to 2.1% in the third quarter   This more rapid growth rate for final sales was caused by the sharp drop in inventories in the fourth quarter.  Once they are eliminated the growth rate for final sales is relatively robust.  Over the past year final sales have risen 2.7%.  In the fourth quarter inventories rose $13.1 billion compared to a $69.4 billion run up in the third quarter. Thus, inventories  subtracted 1.0% from GDP growth in the fourth quarter.  Inventories are expected to plunge in the second quarter of  2020 as manufacturing activity slows dramatically..

Final sales to domestic purchasers excludes both the change in inventories and trade rose 1.6% in the fourth quarter after having risen 2.2% in the third quarter.  In the fourth  quarter the deficit for net exports narrowed by $900.7 billion from $990.1 billion to $899.6 billion.   In that quarter exports rose 2.1% while imports plunged by 8.4%.  Given that final sales to domestic purchasers rose 1.6% while final sales rose 3.1%,  it is clear that the trade component added 1.5% to GDP growth in that quarter.  Over the past year this series has risen at a 2.3% pace.

Consumption spending expanded by 1.8% increase in the fourth quarter after having jumped 3.2% in the third quarter.  But all of that will change beginning in March and continuing through the third quarter as the government’s response to the corona virus takes its toll on the U.S. economy.  We expect consumer spending to decline almost 20% in the second quarter..

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Nonresidential investment fell 2.3% in the fourth quarter after having dropped 2.3% in the third quarter.  For 2019 nonresidential investment fell 0.3%   As we go forward investment spending is going to plunge in the second quarter of 2020.  We envision a drop of about 19% in that quarter.

Residential investment jumped 6.2% in the fourth quarter having having risen 4.6% in the third quarter as lower mortgage rates stimulated the growth in sales.   The demand for housing was robust,   But that will change in the first half of this year.  We look for residential investment to fall about 20% in the second quarter.

The foreign sector as measured by the deficit for real net exports In the fourth  quarter narrowed by $90.5 billion from $990.1 billion to $900.7 billion.   In that quarter exports rose 2.1% while imports plunged by 8.4%. . The trade gap is likely to widen substantially in the second quarter of this year as exports plunge and imports fall sharply.

Federal government spending rose 3.4% in the fourth quarter after having climbed 3.3% in the third quarter.  We expect Federal government spending to rise 5.3% this year as both defense  and non-defense spending climb.

Following GDP growth of  2.3% in 2019 we expect growth to decline 1.0% in 2020.

Stephen Slifer

NumberNomics

Charleston, SC