This week we got the second look at Q4 GDP, which showed the economy grew at a 2.3% annualized pace. Which was the same as the 1st estimate, but below the historical average of 3.2%.
Consumer spending and business investment were revised slightly lower, while inventories, net exports, and government spending were revised higher.
Real GDP is now 2.5% higher over the last 12 months, which is also below the historical average of 3.2%.
Looking at the details of the reports, we see that consumer spending remained strong (actually coming in higher than the prior quarter), but it was business investments and inventories that dragged growth down.
Government spending accounted for 20% of GDP, so it isn't surprising to see some trepidation of what future spending cuts will do to the economy.
Looking ahead into Q1, January started mixed with personal incomes rising 0.9% in January, which was better than expected, and +4.6% over the last 12 months. Personal incomes have risen above the rate of inflation for the 9th straight month now.
But the big drag came from consumer spending, which came in -0.2% in January when the street was expecting a gain of 0.2%. This was the worst month on spending since February 2021. But spending is still up 5.6% over the last 12 months.
Broken down by category, we can see spending on services still grew +0.3%, albeit at a slower pace.
Spending on goods was the big drag on growth, declining -1.2% for the month. Albeit still up 3.7% over the last 12 months.
These results on Friday pushed Q1 GDP estimates sharply lower, actually according to the Atlanta Fed GDP now estimates Q1 to be negative. Part of this is due to the slowdown in the consumer, but the main reason has to do with the sharp decline in net exports.
It appears that due to the proposed tariffs, US companies are stocking up on imports ahead of time. This sharp increase in imports is pushing the trade deficit even lower. I don’t think we should assume this will carry on for any length of time, so I don’t think investors should be overly worried about this. But we’ll have to wait and see.
Last month, I mentioned how February was the 2nd worst month for stock market returns and even worse than average after we have a strong January. Well now we head into a favorable seasonality period for the markets. March and April have been the second strongest back-to-back months in terms of average returns. March has been the 4th strongest month in terms of average returns.
While its also the 4th strongest month in terms of % of the time it closes higher for the month.
We are also in the 1st year of the presidential cycle, which average returns have shown that Q1 has been the weakest quarter of the year. And then things have gotten better afterwards.
This is not a prediction. No one knows what the market will do. My guess is as good as yours.
Now that all January data is in, the scorecard reflects the mixed-bag economic environment we are in. 10 of the 20 most important data points that I follow beat or came in as expected, while the other 10 came in below expectations.
Consumer spending, confidence, and housing were the main drags, while manufacturing, private sector employment and personal incomes led the biggest upside surprises.