GDP Revision Bolsters Economic Confidence
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A sudden and surprising revision to U.S. GDP growth is bringing newfound confidence that the American economy is getting better.
After a number of weakening economic indicators, including rising jobless claims, lower home purchases, and contracting manufacturing activity, the Bureau of Economic Analysis (BEA) revised its estimate for fourth quarter GDP growth in the U.S. to 1% growth, after rising 2% in the third quarter.
A sudden and surprising revision to U.S. GDP growth is bringing newfound confidence that the American economy is getting better.
After a number of weakening economic indicators, including rising jobless claims, lower home purchases, and contracting manufacturing activity, the Bureau of Economic Analysis (BEA) revised its estimate for fourth quarter GDP growth in the U.S. to 1% growth, after rising 2% in the third quarter.
The BEA saw improved demand and spending from American consumers, which offset a decline in foreign demand for American goods. “The increase in real GDP in the fourth quarter reflected positive contributions from personal consumption expenditures (PCE), residential fixed investment, and federal government spending that were partly offset by negative contributions from exports, nonresidential fixed investment, state and local government spending, and private inventory investment,” the BEA said in its report.
At the same time, imports saw a slight decline as Americans consume fewer foreign goods. “Imports, which are a subtraction in the calculation of GDP, decreased.”
Private Demand Driving Growth
Many economists noted the most surprising revelation in the BEA study was that private consumption is driving GDP growth, indicating Americans are more confident in the economy than some recent studies suggest.
Private demand growth is decelerating, however, as personal consumption expenditures, while still growing, are growing at a lower rate and are expected to fall further in the first quarter of 2016. That decline may also result in weaker GDP growth at the beginning of this year.
That said, many investment banks released cheerful notes to clients on the news, urging investors to buy stocks and invest in a resurgent America. After several warnings about recessions coming from many quarters, two large investment banks informed clients that the fears were misplaced, as the recent BEA study indicated demand remains high in the U.S. and the domestic economy remains resilient.
Recent investment sentiment has soured sharply, causing the S&P 500 to remain in negative territory for 2016 and many investors to panic and leave the market in droves. Investment banks said that the still positive GDP indicates that a recession is unlikely in 2016 or 2017, causing the recent dip to be a rare buying opportunity for stocks.
One analyst also noted that stocks are increasingly trading alongside oil, in an “irrational” correlation between the two. Arguing that lower oil prices will result in higher PCEs, albeit this has not been observed quite yet, the analyst suggested consumer discretionary stocks would be strong outperformers by the end of the year.
The S&P 500 surged on the news late last week, while U.S. Treasury yields also rose after touching on all-time lows. The 10-year Treasury remains below 2%, however, and that is driving down the cost of mortgages and other forms of credit, despite the Federal Reserve’s recent attempts to increase borrowing costs.
