January 30, 2020

The preliminary estimate of fourth quarter GDP growth came in at 2.1% which was roughly in line with what had been expected.  That compares to GDP growth of 2.1% in the third quarter.   For 2019 as a whole GDP rose 2.3%.  The fourth quarter growth rate included a surprisingly large boost from a reduction in net exports as imports  plunged .8.7%.  But that narrowing of the trade gap is almost certain to be largely reversed in the first quarter of this year.  In addition, inventories plunged in the fourth quarter which was a significant drag on GDP growth.  But, like the trade component it will be reversed in Q1.  On balance, our outlook for GDP growth in 2020 has not changed.  We  continue to expect GDP growth of 2.4% this year.

Final sales, which is GDP excluding the change in business inventories rose 3.2% 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 $6.5 billion compared to a $69.4 billion run up in the third quarter. Thus, inventories  subtracted 1.1% from GDP growth in the fourth quarter.  Inventories are expected to rise $60.0 billion quarterly in  2020.

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 $88.1 billion from $980,7 billion to $902 billion.   In that quarter exports rose 1.4% while imports plunged by 8.7%.  Given that final sales to domestic purchasers rose 1.6% while final sales rose 3.2%,  it is clear that the trade component added 1.6% 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.  Steady employment gains of about 170 thousand per month continue to boost  income.  The consumer has little debt.  And interest rates remain very low.  Everything related to the consumer seems quite solid.  We expect growth in consumer spending of  2.6% in 2020..


Nonresidential investment fell 1.5% in the fourth quarter after having dropped 2.3% in the third quarter.  For 2019 nonresidential investment fell 0.1%   But the various components of investment spending tell different stories.

The structures and equipment spending categories both declined sharply in the fourth quarter as the manufacturing sector continues to be hit by the tariffs.  In contrast, intellectual property jumped 5.9% in the fourth quarter and rose 6.2% in 2019.  This category includes spending on computer hardware and software.  In extremely tight labor market conditions firms are turning to technology to make their existing employees more productive.  They can thereby boost output without increasing headcount.  Because of the strength in this category we expect nonresidential spending to increase 2.3% in 2020.  .

Residential investment jumped 5.8% in the fourth quarter having having risen 4.6% in the third quarter as lower mortgage rates stimulated the growth in sales.   While demand for housing remains robust,  builders are having a difficult time finding qualified workers which curtails growth in this category.   As the result, we expect residential investment to increase a moderate 3.0% in 2020..

The foreign sector as measured by the deficit for real net exports In the fourth  quarter narrowed by $88.1 billion from $980,7 billion to $902 billion.   In that quarter exports rose 1.4% while imports plunged by 8.7%.  .  We expect the deficit reverse  much of that drop in imports in the first quarter.  While this component bounces around from quarter to quarter, it turns out that trade added 0.4% to GDP growth last year and we expect it to subtract about 0.2% from GDP growth in 2020.

Federal government spending rose 3.6% in the fourth quarter after having climbed 3.3% in the third quarter.  We expect Federal government spending to rise 3.6% this year as both defense  and non-defense spending climb by a moderate amount.

Following GDP growth of  2.3% in 2019 we expect growth of  2.4% in 2020.

Stephen Slifer


Charleston, SC