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GDP: There Are Positives Moving Forward

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The most recent GDP estimate for the 4th quarter of 2015 came in at 0.7%, a tenth weaker than the 0.8% expected. If you missed the full report or would like to dig into the details, endless data is available at Bureau of Economic Analysis.

Fixed Income Academy’s Chief Economist, David Horner, Ph.D., believes the components suggest that although growth will remain subdued, it is likely to increase gradually as 2016 progresses. On balance, he expects growth in the first quarter to be near 1.5% and expects it to revert to the 2 percent area for the remaining three quarters, while the risk in the second quarter is a bit to the downside; the risk to the second half is a bit to the upside.

Because we encourage Academy students and fixed income professionals to understand the inputs behind any forecast to form their own opinions, David also points out the factors to watch in the near term. We feel reviewing the positive and negative inputs to GDP would help anyone interested in bonds, given its strong correlation between the economic recovery, inflation and interest rates.

The positives going forward are:
 

  • Inventory reductions subtracted 0.45 percentage points from growth following a 0.71% reduction in the third quarter. Inventory levels appear to be well contained and should not be a drag in 2016. 
  • Although the consumer contributed less growth, 1.46 percentage points in the fourth quarter than in the third, 2.04 and second, 2.42 quarters, household balance sheets appear in good shape with employment gains continuing and lower gas prices increasing real purchasing power. Thus, I expect the growth contribution in the first half to be above the fourth quarter and contribute 2 percentage points to growth.
  • Residential housing will likely contribute a quarter point to growth, and
  • Because fiscal policy is looser, the Federal government will likely contribute at least a quarter point to growth.
     

However, there are weaknesses:
 

  • Investment spending, which subtracted 0.24 percentage points from growth in the fourth quarter, will probably be negative in the first quarter. Investment in energy and mining will continue to erode.
  • The strong dollar and slow overseas growth will continue to undermine net exports. However, I expect aggressive monetary policies from our trading partners will gradually limit the downside as the year progresses. Moreover, I do not look for the dollar to strengthen as fast as it did in 2014 and 2015. Nevertheless the lagged effect of the strong dollar will probably subtract a quarter to as much as a half a percentage point to growth in the first half.
     

Of course, when forecasting economic recoveries, it is always critical to keep an eye on employment. Rising employment has underpinned moderate growth since the 2008-2009 financial crisis and subsequent recession. David also expects continued employment gains, but at a somewhat lower level than the 200,000 plus average of the past several years. Although employment gains fuel growth, actual jobs are a bit of a lagging indicator of growth and the recent growth slowdown will likely cut into the number of new jobs for several months.

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