THE DEBATE: Today’s preliminary GDP estimate provides some fertile fodder for both sides of the perma-crowd. GDP slowed QoQ but accelerated YoY. Real Final Sales accelerated but Real Final Sales to Domestic Purchasers decelerated. Services consumption accelerated but residential (i.e. housing) fixed investment growth collapsed. Headline GDP slowed sequentially but with aggregate Consumption growth accelerating in 4Q, the complexion of the under-the-hood numbers are arguably better than 3Q which was juiced by inventory build and characterized by slowing household demand growth.
OUR SUMMARY TAKE & GIP (Growth/Inflation/Policy) MODEL Update:
The net impact to our GIP model from this morning’s data is a modest shift in trajectory towards quadrant #3 – Slowing Growth and Rising Inflation - in 1H14.
To reprise, in Quadrant #2 – Growth Accelerating as Inflation Accelerates – equities can certainly still work, particularly if fund flows and policy are both supportive.
As an economy moves deeper into quad #3 (think slowing topline and margins compressing), however, the case for equities gets increasingly weaker as profits slow and multiples take a hit.
Over the last month the model has been equivocal in terms of signaling a move to Quad 2 or 3 for the U.S. and we’ve moved from being explicitly bullish to carrying lower gross and tighter net exposure to domestic equities.
As we’ve highlighted, it has been trickier on the fundamental side as we’ve been listing in a macro purgatory of sorts with the balance of fundamental macro data slowing modestly from a rate of change perspective into 1Q14 while remaining largely good on an absolute and Trend basis.
In that situation we default to the price signal which has been explicitly flashing red as the SPX broke TRADE support, the VIX broke through TREND resistance (14.91) on the upside, the 10Y failed at TREND resistance (2.80%), and #InflationAccelerating signals have confirmed with breakevens up and the CRB Index outperforming most every asset class YTD.
We’ll change as the data and price signals do, but as it stands currently, we’re the least bullish we’ve been over the TTM
THE DATA: Below is a summary review of this morning’s advance estimate for 4Q13 GDP
Real GDP = +3.2 QoQ (decelerating) and +2.7% YoY (Accelerating)
C: Consumption: Accelerated to 3.3% QoQ vs. +2.0% in 3Q13…contributing +2.26 to GDP vs. +1.36 last qtr
I: Investment: Big deceleration to +3.4% QoQ vs. +17.2% in 3Q13…contributing +0.56 to GDP vs. +2.56 last qtr
G: Government Expenditures: Down -4.9% QoQ vs. +0.4% in 3Q13…contributing -0.93 to GDP vs. +0.08 last qtr
E: Exports: Net Exports contributing +1.33 to GDP vs 0.14 last quarter with Exports growing at a steep premium to imports. Exports = +11.4% QoQ, Imports, +0.9% QoQ.
Residential Investment: Down -9.8% QoQ and contributing -0.3 to GDP vs. +0.3 in 3Q13 as housing activity flags.
Inventories: Reversing a bit from a contribution perspective but still contributing positively to GDP at 0.4. While the ISM Survey data suggest vendors remain largely unconcerned with inventory levels, inventory drawdown will likely drag on domestic investment figures over the next quarter or two.
Inflation: Inflation readings falling with the GDP Price index down 0.7% sequentially to +1.3% and the Core PCE down 0.3% QoQ to 1.1%. On the margin, sequential disinflation sits as a taper cessation signal, particularly with Yellen at the helm.
Real Final Sales (GDP less Inventory Change): Solid at +2.8, accelerating 30bps sequentially
Gross Domestic Purchases (GDP less exports, including imports): Weaker sequentially at +1.8% and decelerating -210bps QoQ
Real Final Sales to Domestic Purchasers (GDP less exports less inventory change): Perhaps the cleanest read on domestic private sector demand was largely flat sequentially, decelerating -20bps to 2.0% QoQ.
Consumption: NonDurables remained strong, but most of incremental strength came on the Services side, which had been the laggard over 2H13.
- Services: Accelerating +180bps QoQ to +2.5%...contributing +1.1 to GDP
- Durables: Decelerating 200bps QoQ to 5.9%...contributing +0.4 to GDP
- NonDurables: Accelerating 150bps sequentially to +4.4% QoQ…contributing +0.7 to GDP
INITIAL CLAIMS: BENIGN
This week’s initial jobless claims data was relatively benign with the 4-wk rolling average in YoY non-seasonally adjusted claims – our preferred read on the domestic labor market – basically in-line with the YTD TREND rate of improvement at -6.6%. Headline claims increased +19K WoW to +348K with the 4-week rolling average ticking up 1K to +333K.
Normal seasonal volatility in the data will continue to ebb as we move through February while the broader "Ghost of Lehman" seasonal distortion stemming from the expedited employment loss at the onset of the great recession - which was captured, in large part, as a seasonal factor instead of a bonafide shock – will persist as a tailwind to the reported data through 1Q14. We continue to expect headline claims to track towards its historical, friction lower bound at ~300K over the next month+.
Christian B. Drake