This morning’s Q4 GDP report was a headline miss (2.6% versus an expected reading of 3.2%), mostly explained by the inability of strong consumer spending to overcome investment malaise. Bank of America Merrill Lynch’s economists break it down thusly:
Consumer comeback, slower investment
Consumer spending surged 4.3% qoq saar, which was the largest increase since 1Q 2006, and contributed 2.9pp to GDP growth. Goods spending contributed 1.2pp to growth, with durables adding 0.5pp and nondurables adding 0.7pp. Growth in services consumption was a bigger driver, adding 1.7pp. Within services, healthcare spending contributed 0.5pp for the third straight quarter, and was the largest of any major subcategory. This likely reflects the expansion of health insurance coverage from the implementation of the ACA.
The news on the investment side was mixed. There was a significant pickup in inventories to $113.1bn from $82.2, which contributed 0.8pp to GDP growth. However, we think this was largely unintentional and should result in a drawdown in 1Q. Fixed investment growth slowed to 2.3% qoq saar from 7.7% in 3Q, adding only 0.4pp to GDP. The weakness was concentrated in equipment spending which dropped 1.9%—this could be a bit of a payback after strong 11%+ growth in 2Q and 3Q. That said, core capital goods orders continued to contract in December, suggesting further decline heading into 1Q 2015. Residential investment provided a small offset to these data, growing 4.1% qoq saar in 4Q versus 3.3% in the prior quarter.
The consumer stands above it all
Bank of America Merrill Lynch – January 30th 2015