It was a wonderful week for equity markets, a welcome relief, as GDP increased more than expected. But don’t be fooled; GDP is a backward-looking measure, and digging into the details, it could have been much more encouraging than the headline number suggested. The U.S. Bureau of Economic Analysis (BEA) released preliminary Q4 2022 GDP numbers on Thursday, indicating an annualized 2.9% increase versus expected growth of 2.6%. This followed Q3 2022 GDP growth of 3.2%, neither of which indicates an impending recession. However, when peeling back the layers of the GDP onion, there is less strength than the initial numbers indicate.
First, inventory investments accounted for half of the total Q4 increase. Changes in the rate of inventory accumulation are erratic and not expected to continue expanding relative to the economy, so this is likely to be less impactful in the future. Similarly, backing out government spending and trade balance impacts removes another 40% of the increase in GDP. What’s left is a metric called “final sales to private domestic purchasers,” a highly regarded subcomponent of GDP that gives a proxy for underlying economic demand. This metric dropped to just 0.2%, its lowest level since Q4 2009 (excluding the COVID decline) and a level that rarely occurs outside of recessionary periods. So while headline GDP was strong, the underlying numbers corroborate the narrative of a slowing economy.
Economy
- The U.S. equity markets bounced higher for the week ending January 27, with the S&P 500 up 2.5% and the tech-heavy Nasdaq now up 11% for the month. Headline GDP was better than expected, and the PCE price index showed continued deceleration of inflation.
- The U.S. economy expanded at an annualized 2.9% in Q4 2022, beating forecasts of 2.6%. Spending on goods jumped 1.1%, led by motor vehicles and parts. Spending on services slowed to 2.6%, with personal care, health care, and housing/utilities services leading the rise. Consumer spending increased 2.1%, below 2.3% in Q3, and forecasts of 2.5%. Considering all of 2022, GDP expanded by 2.1%.
- Core PCE prices in the U.S., which exclude food and energy, went up by 0.3% MoM in December 2022, compared to a 0.2% increase in the prior month. The Federal Reserve’s preferred inflation gauge fell to 4.4%, down from 4.7% in November, marking the slowest expansion in 14 months. Meanwhile, the headline index edged up 0.1% last month, the same as in November. In the 12 months through December, the index increased by 5.0%, the least since September of 2021, and below 5.5% in November.
- Personal spending in the U.S. dropped 0.2% MoM in December 2022, worse than market forecasts of a 0.1% decline. In addition, the drop follows a revised 0.1% decline in November. High-interest rates and continued inflation have started to impact consumer behavior. Spending fell on goods (gasoline, motor vehicles, parts) and services (housing, air transportation, health care).
- For the week ending January 21, new claims for unemployment benefits fell by 6,000 from the previous week to 186,000, the lowest since April, and well below expectations of 205,000. The result consolidated evidence of a tight labor market, despite significant tech layoffs and the Federal Reserve’s aggressive tightening path last year.
Stocks
- U.S. equities were in positive territory. Consumer Discretionary and Communication Services were the top performers, while Healthcare and Utilities lagged. Growth stocks led value stocks and small caps beat large caps.
- International equities closed higher for the week. Emerging markets fared better than developed markets.
Bonds
- The 10-year Treasury bond yield increased 3 basis points to 3.51% during the week.
- Global bond markets were in negative territory this week.
- Corporate bonds led for the week, followed by high yield bonds and government bonds.
