Name: What the Strong 4th-Quarter U.S. GDP Report Tells Us About the State of the Economy
Uploaded: 2024-01-25T15:32:00Z
Duration: 14 min 51 s
Description: The U.S. economy gained strength during the year, as Americans continued to spend money, giving the economy an unexpected boost. WSJ’s Dion Rabouin digs into the latest GDP report to explain the most important details for investors in 2024. Photo: Frederic J. Brown/AFP/Getty Images

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The U.S. economy gained strength during the year, as Americans continued to spend money, giving the economy an unexpected boost. WSJ’s Dion Rabouin digs into the latest GDP report to explain the most important details for investors in 2024. Photo: Frederic J. Brown/AFP/Getty Images

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What the Strong 4th-Quarter U.S. GDP Report Tells Us About the State of the Economy

Hey, everybody. Welcome, welcome, welcome into another edition of "Market Takes." If you got a big smile on your face, I think I might know why. we're gonna get into that in just a minute. I'm Dion Rabouin reporter at "The Wall Street Journal." Today, we're talking about the U.S. GDP Report from the fourth quarter. Rounding out one of the last big data releases from 2023, we are gonna talk about how much the U.S. Economy grew in the fourth quarter of 2023. And man, this was a good quarter, a strong quarter. GDP was flexing its muscle. The U.S. consumer was flexing its muscle well above expectations. We are gonna talk about what the headline numbers were in this report, how that compared to expectations. We're gonna talk about some details, get into some nitty-gritty. There was a lot in this report that was very good, very, very strong. But there were a couple things that might post some worry. So we're gonna get into those. We're gonna talk about the market reactions. Investors really like this report on both the stock and the bond side. We're gonna talk a little bit about currencies as well. We're gonna talk about how this GDP Report affects what comes next for the Federal Reserve. They've got a meeting next week. Of course, we'll be breaking it down right here on "Market Takes." We're gonna talk about that in just a minute. And of course, we're gonna watch what comes next. So we're gonna talk about what comes next 'cause you know, here on "Market Takes," we are always looking forward, even though it is backward-looking data. So let's get into it y'all. The Q4 GDP Report showed U.S. GDP rose 3.3% in the fourth quarter. Let's throw the chart up here on your screen so you can see what we're talking about. And you see just those big columns right there on the right side of your screen. That's 4.9% growth in the third quarter and 3.3% in the fourth quarter. That is well above what economists call trend growth. So when you think about how much the U.S. Economy should be growing, all things equal, all things considered, U.S. Economy usually grows about 2%, and that's about trend growth. We have seen back-to-back quarters well above trend growth. And we are far away from those two negative quarters you saw there, starting in 2022, that really kicked things off and had folks worried. 2023, the Fed had expected about 0.4% growth. U.S. Economy jumped way past that. We had 2.5% real GDP growth for the year. That is major. That's six times what the Fed was predicting in March. And honestly, at the time when the Fed said 0.4%, a lot of folks thought they were being optimistic. A lot of folks were pricing in a recession this year, especially on Wall Street. Big bankers, economists, money managers, you name it, they all were predicting a recession. You look at those last four bars on your screen, no recession seen there. And again, this really just illustrating the strength of the U.S. consumer, of the U.S. Economy in 2023. We saw not just good growth, not just solid growth, very strong. Say it again, strong growth. Strong growth in 2023 from the U.S. Economy. I wanna read you something my man, Mark Zandi, he's the chief economist at Moody's Analytics. I'm gonna read it to you verbatim. This is what he said. He put this out on, I was gonna say on Twitter, it's now X. You guys know that. But Mark Zandi saying on X, from Chief economist at Moody's Analytics, quote, "Goodness, the increase in GDP at the end of last year was meaningfully stronger than I had expected. Not only did consumers spend and businesses invest more as anticipated, but unexpectedly, trade and inventories added to growth. But despite the robust growth, inflation was tame. The core consumer expenditure deflator was 2% on the nose in the second half of the year, the Fed's target. Strong growth and low inflation feels very good." I've been talking to Mark Zandi for a long time. He is not usually that excited about a report, but really, there was a lot to be excited about. I'm gonna read to you from the report. This is actually from the Bureau of Economic Analysis' GDP Report. This is direct from there, quote, "The increase in real GDP reflected increases in consumer spending, exports, state and local government spending, non-residential fixed investment, federal government spending, private inventory investment, and residential fixed investment, imports, which are a subtraction in the calculation of GDP, increased." So the only reason GDP wasn't higher was because we imported too much stuff. Folks were on a buying spree, whether that's corporations, whether that's companies, whether that's the government, whether that's individuals. People talked about the strong U.S. consumer holding this up. It was also the strong U.S. government. It was also strong U.S. companies going out, spending money. That's what we saw in the fourth quarter. There was all this worry about uncertainty, about folks pulling back, about, "Oh, we don't know if businesses are gonna invest." They invested in a big way, and that was why you saw this GDP growth at 3.3%. Little bit of, "You get a car, and you get a car, and you get a car. You get some fly new shoes. You get a new suit." That was what folks were doing. They were out there buying, spending big. Headline, PCE, let's pull it back a little bit. One place that you might be a little bit worried is that PCE number in the GDP Report. That's inflation. Inflation up 2.8%. Now that was down from the third quarter. So a little bit lower than what we saw in the third quarter, where we had almost 5% quarter over quarter growth. 2.8% inflation growth in Q4. But that was higher than expected. Expectations were for about 2 1/2%. So inflation again, coming in higher than expected for the quarter. Core PCE was 2%. Same as in Q3. That's what Mark Zandi was referring to. The Fed likes to focus on core. When you strip out those volatile food and energy prices, 2% growth in inflation. So really growth in the fourth quarter was basically right at the Fed's target. That's what got Mark Zandi all excited. And that tells us, you know, the big takeaways, one, growth up, inflation down, #Winning for the U.S. Economy. Big things. Now, you know, here on "Market Takes," we don't just celebrate, you know, the big headline numbers. We don't just talk about the big things in bold. We get into the fine print. We get into the details. So let's talk about some of those. Let's talk about disposable personal income. That was 4.2%, well above the 2.9% in Q3. Again, folks had more money. After taxes, in terms of what they've got, their personal income up 4.2%. On the other side of that, some worrisome numbers in the report, because I thought that disposable personal income number, very good, very strong. But what we have been seeing is that a lot of this growth is being financed on credit, credit that is more expensive than it's ever been, particularly on credit cards. Personal loans, more expensive than they've been in years, maybe in decades on some measures. We're seeing a lot of this spending is not financed by folks having more money in their pocket. They're getting credit cards. They're taking out loans. They're borrowing to finance this spending, and that's what we're seeing. So we saw the personal savings rate drop to 4%. This has continued to fall. A number of economists have talked about this rate and this level of personal savings being unsustainable. This is well below the 10-year trend, well below the 15-year trend. Folks usually save a good bit more. We are at 4%. That's around half of the level that the personal savings rate usually is. Keep your eye on that. So what we're seeing as we're seeing that personal savings rate drop down, well, it's not just that folks are spending more of their income, they're spending more of their income, and they're taking out in their borrowing. Credit cards or revolving credit in November. We saw revolving credit, which is basically things like credit cards, that's most of what revolving credit is, that rose at 17.7%. That was the biggest gain since March of 2022. So a huge gain in spending on credit cards. Consumer credit overall rose 5.7%, well above historical norms, and total consumer credit has now reached $5 trillion for the first time ever. And remember that this is happening while we're seeing a dramatic slowdown in the home sales market or in the housing market. So while we're seeing this dramatic slowdown in the housing market, which means less folks are taking out mortgages, less folks are buying money, or I'm sorry, borrowing money, to put towards a house, they're borrowing it a lot to buy for things like clothes, things like cars. So we're not seeing this go towards asset-backed purchases the way we usually do with something like a house, right, an appreciable asset. Usually when consumer credit rises at these big rates. at these big time increases, it's because the housing market is on fire. Folks are taking out mortgages. and usually. economists see that it's sustainable because most of the time, the value of the house goes up. So even if you have a little bit of trouble in your life, you lose your job, things like that, if things get really tight, you can sell your house, you'll be all right. But now what we're seeing is folks stacking that credit and stacking that borrowing for just kind of more low-budget things. The Durable Goods Report that also came out this month was worse than expected. It showed a 0% increase. So we're not seeing the big spending going on durable goods. It looks like folks are borrowing to buy things like fresh new gear, you know, spending on day-to-day items, spending for things in their life or vacations, things like that. But it's not on these big ticket purchases. We've seen the price of cars rise in a big way. We've seen the price of housing rise in a meaningful way, but again, we're seeing a slow down there. So one thing you do want to be a little bit worried about in this report is this big increase in consumer credit combined with a big decrease in personal savings. And a lot of folks, where a lot of that big increase in credit is coming from is credit cards, which are at some of the highest rates in history. So keep your eye on that. It's the thing I've been pounding the table on for a while here at "Market Takes." There's one report in this economy, if there's one worry about this economy right now, it's that this growth seems to be financed by credit and borrowing, which is not really sustainable. But let's get back to the good feelings. Let's take a look at the market because the stock market really liked this report. Really Markets overall were big fans of this report. So I wanna throw up here on your screen what we're seeing from Markets. You're seeing the DAA, the Nasdaq, the S&P all in the green. China Shanghai Composite, up 3%. China is right now starting to bounce back. And that could be a big part of the overall stock market story for a while. So keep your eye on China and what we're seeing there. Look at that for the day. The other thing I wanna point your attention to is what we're seeing in the bond market. Now, usually when you see above expected growth in the U.S. GDP, that tends to coincide with higher inflation. Folks say, "Okay, well, the economy's growing more, that means they'll be more inflation." So bond yields come down, but we are seeing the opposite of that today. As this report came out, you saw a little bit of spike right here. The 10-year Treasury Note Yield jumped up to about 4.18%. But then we are seeing a move solidly lower, which means that folks are buying bonds, which means there's a bit more worry about growth and less worry about inflation, which is unusual when you get a print like this. And we're seeing this across the board. Even in the third year, you're seeing kind of the same thing. Look, the 2-Year Note, which is much more correlated to what folks expect from the Federal Reserve, that's moving lower as well. So really what the market is telling us and what we're seeing illustrated here from the market and from investments and from investors as well is that this report is not expected to meaningfully change the outlook for inflation. Folks are taking this Q4 GDP Report as just strong growth. Inflation's coming down, even though it's maybe a little higher than expected. The market is very excited about that, and that's certainly reflected in what we're seeing in asset prices. More record highs. We have seen multiple, I think it's four straight days, of record highs on the DAA, the S&P. We could see those today, tomorrow. This will be interesting as folks digest more of this report. Again, the Consumer Credit Issue doesn't really get into the market's thinking, but that's something you should definitely keep in mind going forward. So what does this mean for the Federal Reserve? The market is expecting the Fed to cut rates this year, but expectations for those immediate rate cuts have dialed back. So this report suggests the focus may shift a little bit. The Fed may now be thinking about, okay, what's going on with jobs? What's going on with the labor market? And I'll tell you, we may just have a little report on that, something, something, on this channel next week. So keep your eyes peeled for that. If the labor market holds, that could be something that the Fed starts to say, "Okay, well maybe now it's time to start cutting rates." I interviewed Fed, or former St. Louis Fed President Jim Bullard the other day. That interview's gonna be coming out Sunday on the "Take On the Week" podcast. Make sure you listen to that. But he was saying that he expects the Fed to cut rates soon and to really get moving before inflation gets to 2%. So it'll be interesting to see if we go there. As we're talking about inflation, the inflation path certainly is not assured right now. PCE and Q4 was higher than expected, but it did continue to decline. And so as we're talking about inflation, because we're talking about the Fed, let's throw a chart up here on your screen so you can see what we're talking about. This is the CPI Report, and what we've seen, you see that big spike up there? That's 9.1% in the summer of 2022, and we've really come down consistently from that, but it looks like we're stalling out a little bit, right around 3%. Remember, the Fed doesn't want inflation at 3%. Certainly doesn't want inflation at 3.4%, which is where CPI was last month. The Fed wants inflation down at 2%. and it looks like we're having trouble really getting to 2% as you see inflation kind of picking up, coming back down, and then picking up again last month. So that's what you see on the CPI Report. The PCE Report, which is the Fed's favored measure of inflation, that's looking a little more promising. You see it coming down. The last three months, it has continued to tick lower, and we are seeing lower numbers on that PCE Report, lower inflation. That report actually got below 3%. The latest PCE Report will be out tomorrow, so you'll want to take a look at that. The PCE number we got in this GDP Report was for the quarter. So for October, November, and December, we saw PCE inflation around 2.8%, Core PCE around 2%. We will get the report for December tomorrow. So again, this chart and these charts just illustrating the way that inflation has consistently been coming down, but maybe stuck around that 3% level. And the Fed's gonna have a lot to think about. You know, we'll be talking about that Fed meeting right here on "Market Takes." It's gonna be Wednesday at 4:00 p.m. Eastern. Make sure you're here with us. If you haven't subscribed, subscribe, and make sure you hit that notification button so you don't miss a minute of "Market Takes." Listen, that's gonna do it for us today. I'm Dion Rabouin, reporter at "The Wall Street Journal." We'll be right back here on Wednesday at 4:00 p.m., talking about the Fed meeting here on "Market Takes." And I want to tell you, make sure, for more, you check out my podcast "WJS's Take On the Week." We cut through the noise to explain all the major business and financial news that moves Markets, all so you can make smarter investments about your financial decisions. Subscribe wherever you get your podcasts. That'll do it for us here on "Market Takes." I'm Dion Rabouin, reporter at "The Wall Street Journal." We'll see you when we do it again next time.