GDP Plusses and Minuses

The Q4/18 GDP report is due out on Thursday and economists are penciling in a dramatic slowdown from the 3.4 per cent pace clocked in Q3. No doubt last year’s massive corporate tax cut was front-loaded, which helped generate a 4.2 per cent expansion in Q2 coupled with 20-plus per cent corporate profit growth. It’s widely expected that both economic growth and profit growth will revert to their longer-term trends this year, as most arrows point toward 2.3 per cent GDP growth in Q4 and much of 2019.

The US economy, though slowing, is exhibiting pockets of strength, particularly the job market. Employers created 2.7 million net new jobs in 2018, and wages are on the rise thanks to a tight labor market. As a result, America’s collective paycheck expanded 9.8 per cent last year when the employment rate, the average work week and average hourly earnings are taken into consideration. Household balance sheets have improved as well: at 14.2 per cent, household debt as a share of net worth is at its lowest level since 1984.

On the flip side, several negatives appeared as we entered Q1/19. Retail sales, a proxy for one of the largest contributors to GDP growth, plummeted by 1.2 per cent in December, according to the US Census Bureau. Discretionary spending failed to expand despite plunging gasoline prices; perhaps December’s stock market swoon weighed on shoppers’ attitudes. If that was indeed the case, the market rebound should bolster confidence and consumer spending this quarter.

Oddly, despite improving household finances, auto loan delinquencies are on the rise. According to the Federal Reserve, nearly 4.5 per cent of outstanding auto loans are more than 90 days past due – the highest level since 2007. Even more odd, by contrast, credit card delinquencies are at multi-year lows. It does seem that Americans’ auto buying binge went too far. Motor vehicle unit sales averaged 17.2 million in 2018 and have exceeded 17 million units consistently since 2015. Like the housing crisis of a decade ago, automobile sales were fueled by lax underwriting standards, suggesting that output levels have probably peaked. A meaningful production pullback would crimp US growth, as the auto industry is one of the most important industries in the US. It historically has contributed 3-3.5 per cent to the overall GDP, according to the Center for Automotive Research.

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