While the final revision to Q4 2015 GDP was so irrelevant it was released on a holiday when every US-based market is closed, even the futures, it is nonetheless notable that according to the BEA in the final quarter of 2015 US GDP grew 1.4%, up from the 1.0% previously reported, and higher than the 1.0% consensus estimate matching the highest Q4 GDP forecast. The final Q4 GDP print was still well below the 2.0% annualized GDP growth reported in Q3.
The figure marks a slowdown from the 2.2% average pace in the first three quarters of 2015. For all of last year, the U.S. economy grew 2.4% matching the advance in 2014.
The reason for the change was largely due to upwardly Personal Consumer Spending, which rose from a contribution of 1.38% to the annualized bottom line to 1.66%. In CAGR terms, personal consumption rose 2.4%, following the 3.0% increase in Q3, higher than the 2.0% previously estimated.
Stripping out inventories and trade, the two most volatile components of GDP, so-called final sales to domestic purchasers increased at a 1.7 percent rate, compared with a previously estimated 1.4 percent pace.
The rest of the GDP components were largely unchanged, with Fixed Investment adding 0.06% to the bottom line, up from 0.02% in the previous estimate, Private Inventories contracting fractionally more than previously estimated (-0.22% vs -0.14%), net trade subtracting 0.1% less from growth (-0.14% vs -0.25%), and finally government spending largely unchanged and hugging the unchanged line at 0.02%.
But while the "resilient consumer" once again carried the US economy in the fourth quarter, largely due to an estimated jump in spending on Transportation and Recreational services, which added an annualized $13 billion to the US economy vs the prior estimate, more disturbing was the drop in profits which we already knew courtesy of company reports and is known confirmed by the BEA whose GDP report also showed that corporate profits dropped in 2015 by the most in seven years.
As Bloomberg writes, the earnings slump illustrates the limits of an economy struggling to gather steam at the start of this year. Some companies, encumbered by low commodities prices and sluggish foreign markets, are cutting back on investment while a firm labor market and low inflation encourage households to keep shopping.
Pre-tax earnings declined 7.8 percent, the most since the first quarter of 2011, after a 1.6 percent decrease in the previous three months. The estimate of nonfinancial corporate profits was reduced by a $20.8 billion settlement, considered a transfer to the government, between BP and the U.S. after the 2010 oil spill in the Gulf of Mexico.
Profits in the U.S. dropped 3.1 percent in 2015, the most since 2008. Corporate earnings are being weighed down by weak productivity, rising labor costs and the plunge in energy prices. Economists at JPMorgan had expected a 9.5 percent drop in pre-tax earnings in the fourth quarter.
"The pace of growth slowed as we ended 2015, though consumer spending is still the primary underpinning of this economic expansion,” Sam Bullard, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said before the report. “Any pickup we might see is still likely going to be capped given the overall global picture.”
And now that we can put 2015 GDP growth to rest, it's time to focus on Q1 2016, where as the Atlanta Fed reported yesterday, growth is on pace to match the anemic 1.4% GDP growth of Q4.
"If profits remain depressed, the prospects for capex and hiring will come under greater pressure,” Wells Fargo’s Bullard said in a research note. Corporate outlays for equipment declined at a 2.1 percent annualized pace, subtracting 0.12 percentage point, the Commerce Department said.
Finally, the upward revision to Q4 consumer spending primarily on services, likely means pulling forward some of the growth that was supposed to prop up Q1 GDP growth, and as such we expect Wall Street economists to promptly revise lower their first quarter growth forecasts as soon as they come back from vacation, which however considering the Fed is now looking for excuses to have cut its dots as drastically as it did a week ago, will be very welcome by Janet Yellen.