GDP Growth not Exactly Glowing
GDP growth for Q4 2013, as expected, was recently revised downward from an initial estimate of 3.2% to 2.4% versus Q3 2013 growth which is estimated to have been 4.1%. GDP growth for the full year of 2013 is estimated to be about 1.9% falling from 2.8% in 2012. Even with the downgrade, growth for the second half of 2013 is now estimated to be 3.3% versus 1.8% in the first half, showing a decided improvement.
The primary drivers of consumption growth were Services, and a jump in spending on housing and utilities (from negative 0.31% to positive 0.14%), as well as Food Services and Accommodations which rose from 0.02% to 0.43% annualized. How much longer consumers can keep this behavior up with shrinking purchasing power remains to be seen.
The bad news emerges from Fixed Investment, which fell from 0.89% to just 0.14% annualized, as investment across the board dipped but mostly in non-residential structures (down negative 0.03% from 0.35%) and a fall in residential fixed investment from 0.31% to negative 0.32%.
Net trade contributed a surprising 1.33% to GDP growth, the most since the 2.39% increase in Q2 2009. How much longer can the US continue boosting its GDP on the back of the shale boom, and declining imports, also remains to be seen. Just like the inventory build-up from the later part of last year that now has to be soaked up, so too a reversal of net trade boost could become a drag on growth, unfortunately at a time when the consumer could also pull back.
Households continue to muddle along, with median household income just over $51,000, which is about where it was 20 years ago. Real disposable personal income recently fell by 2.7% from a year ago, which is the biggest one year decline since the semi-depression of 1974. While the official unemployment rate has fallen to 6.6%, the labor force participation rate, which is the portion of the population either employed or looking for work, is at 63%, a level we have not seen since 1978. If the participation rate was at pre-crisis levels, the unemployment rate would be closer to 13%.
Bottom Line: Enjoy the 2013 Q4 GDP surge as it may not last into 2014. Sustained growth in the economy and the housing sector in particular will remain constrained until household income levels improve on a consistent and stable basis.
Additionally, the low level of economic growth serves as a headwind to stock prices as revenue growth is more difficult in a slow moving economy. Low revenue growth leads to more difficult earnings growth, with the majority of earnings growth for much of the S&P500 over the past few years coming primarily from cost cutting, which has a limit. Future stock price appreciation will be heavily dependent on rising PE ratios, which are already at elevated levels relative to historic norms.
