4th Quarter GDP, December New Home Sales, Leading Indicators and Weekly Unemployment Claims

KEY DATA:  GDP: +4.0%; Annual: -3.5%; Consumption: +2.5%; Housing: +33.5%/ New Homes: +1.6%; Prices (Over-Year): +8%/ LEI: +0.3%/ Claims: -67,000

IN A NUTSHELL: “Economic growth is moderating, not weakening, a crucial difference.”

WHAT IT MEANS:  After expanding by a record rate in the third quarter, it was clearly not a surprise when fourth quarter growth came in way lower. But it is hard to argue that the pace was anything but strong.  When trend growth is a little over two percent, a four percent increase is really good.  For all of 2020, the economy posted its first annual negative growth rate since the Great Recession. It was also the largest annual decline in the last seventy years!  The details, though, were somewhat mixed.  Consumption expanded moderately, but the gains was entirely in the reopening of service companies.  Spending on goods was down.  Business investment was robust and the sharp rises in both equipment and intellectual property point to some improvement in productivity down the road.  There was a huge increase in housing.  Indeed, roughly one-third of the overall increase came from residential investment, a pace that is not sustainable.  On the trade front, exports surged but imports rose even more rapidly.  The widening trade deficit restrained growth even more than housing aided it.  Finally, all levels of government purchases were down.  As for inflation, it remains quite tame, with consumer prices increasing roughly 1.5% whether you included or excluded food and energy. 

New home sales rose moderately in December, but that came after a sharp decline in November.  The increase came from a robust rise in the Midwest and a solid increase in the West, but home purchases fell in the Northeast and the South.  More importantly, the level of sales has come down to something more reasonable, after having skyrocketed in the late summer and fall.  The panic buying may be coming to an end.  Prices, though, continue to surge, as the supply of homes is still quite tight.

The Conference Board’s Leading Economic Index rose moderately in December after having jumped in October and November.  That points to good growth as we move through the spring.

Initial jobless claims fell sharply last week, but let’s not think the report was anything but troubling.  The monthly level of 847,000 is indicative of a weakening not a strengthening labor market.  Even more troubling is the four-week moving average, which smooths out the ups and downs of this volatile measure, continues the slow but steady rise we have seen since it hit bottom at the end of November.   IMPLICATIONS:It is not likely that the economy can continue to expand at the strong rate we saw in the fourth quarter. If you look at the details, consumption was driven by people actually starting to purchase services once again. Meanwhile, household demand for both durables and nondurables was limited.  It doesn’t appear as if the vehicle sales are surging and if that is the case, the moderate consumption growth could continue.  Investment was great, but much of that came from housing, which is already moderating and should continue to do so.On the business side, while spending on equipment should remain strong, the huge increases posted over the last two quarters of the year are not sustainable.  And there is little reason to think that firms will be expanding their footprints anytime soon by building new plants or offices.  The trade deficit surfed and if the U.S. remains the strongest industrialized economy, import growth will likely continue to exceed exports.  That means the trade deficit should widen, restraining growth going forward.   And finally, there is the government spending on goods and services.  The financial reckoning that state and local governments are facing is coming soon.  Meanwhile, there are those in Washington who would rather fund an administrative assistance in a law firm than a teacher, so aid to those hurting entities remains uncertain. This implies a further moderation in growth during the first half of this year.  But I don’t expect that to trouble investors, as nothing seems to bother them.  And finally, there is the Fed, which yesterday told us that they are on cruise control – low rates and lots of investment in assets for a very long time.  Put it all together and you get moderate overall economic growth and the likelihood of more stock market gains.