Hit or Miss
U.S. economic performance showed a little bit of a miss once GDP numbers for the fourth quarter were released. GDP growth came in at 2.6 percent, which was much lower than the 3.4 percent growth forecasted by the Federal Reserve Bank of Atlanta. [i] [ii]
The good news is that key areas of our economic engine continue to fire on all cylinders.
If you separate GDP into its components, consumption added 2.6 percentage points to growth alongside fixed investments (residential and non-residential), which added 1.3 percentage points. [i]
The drag on GDP growth was due to businesses draining inventories as well as net exports. Together these inputs detracted 1.8 percentage points from GDP growth in the fourth quarter. [i]
Keep in mind that consumption is the largest part of U.S. GDP, representing almost 70 percent of our economy. [iii] So, although GDP growth missed compared to forecasted expectations, consumption was a hit.
It is worth noting that a key area driving strong consumption in the U.S. is the personal savings rate. Consumers are continuing to spend their income and save less as evidenced by our declining personal savings rate. In fact, the personal savings rate in the U.S. has not been this low since September 2005. [iv]
Some may view this as a miss because consumers are saving less. However, some (including me) might view this as a hit because consumers are gaining more confidence in their jobs, wages, and financial strength; thus, they are willing to spend more and save less. In my opinion, that is a benefit for a consumption-driven economic system.
Nevertheless, it appears that strong consumption is continuing to support strong corporate earnings. Earnings for the fourth quarter are an unqualified hit. So far, 24 percent of S&P 500 companies have reported earnings. Of those, 76 percent have reported positive earnings surprises, and 81 percent have reported positive revenue surprises. In fact, so far, every sector (with the exception of telecom) is beating earnings expectations. [v]
Another significant hit is the expectations for earnings growth in both the first quarter of 2018 and for the full year 2018. As you can see below, these estimates are now much higher than they were previously projected on December 31. [v]
Clearly, there are many more hits than misses in the economy. Meanwhile, we are still waiting to determine whether the $1.5 trillion tax cut will be another hit or miss. My guess is that it will be a hit when combined with smart regulation reform, infrastructure spending, and more consumerism.
Tim Phillips, CEO, Phillips & Company
Robert Dinelli, Investment Analyst, Phillips & Company