Increased conflict of interest (rate): when GDP is almost entirely stored

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Given January 26 Census Bureau data on retail and wholesale inventory, there was a solid but not necessarily good reason to suspect that the BEA’s Jan. 27 US real GDP report might surprise on the upside. The way the GDP is tabulated, the inventory contributes to the figured increase; the larger the inventory, the higher the calculated output.

The increase in total economic output in the fourth quarter compared to the third quarter was widely expected at around 5.5% (q/q, SAAR). This was already expected to be a nice rebound from the previous quarter, from Q3 to Q2, when real GDP only gained (revised) 2.3%.

This previous and surprising (to some) low rate had been uniformly blamed on the COVID delta disrupting the economy in late summer, thus seen as nothing more than a well-understood temporary soft patch.

These latest estimates show that real GDP exceeded those expectations by a substantial margin, coming in at 6.7% rather than 5.5%. But, as I have already started, this does not represent a victory over delta, nor a surrender to omicron at the end of the fourth quarter.

On the contrary, it was almost all the inventory. A ton, in fact so much all at once, ended up being a record positive change in private stocks matching what the census data had already indicated.

Real GDP inventory

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Real GDP inventory

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Actual final domestic product sales

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According to these updated estimates, the change in private inventories went from a decline of $60.2 billion in the third quarter to a huge addition of $224.7 billion in the fourth quarter. By standard accounting, the move from a contraction in the third quarter to a record increase in the fourth quarter contributed almost five full points to the overall growth rate of 6.7% in the fourth quarter.

Without all these goods – contradicting the common interpretation of empty shelves – GDP expansion would have been less than 2% for the second consecutive quarter. This is the persistent theme in all data. In fact, actual domestic product final sales (above) record just how much the latter half of last year had really weakened.

Thus, while consumer spending has been exceptionally high on goods, it has not accelerated at all since around June or July (recurrence global theme). On the contrary, the rate of spending on goods has declined outright, even from an all-time high – just as all those goods ordered when supply and shipping issues were at their worst are finally starting to emerge from the logistical mess.

It cannot be a delta or some variant of corona since the lack of spending, despite all the money from the government before, also continued throughout the fourth quarter.

real GDP;  personal consumption expenditure

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real GDP;  personal consumption expenditure

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real GDP;  personal consumption expenditure

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Overall, spending on services is still lagging behind the previous peak in 2020, meaning there appears to be a limit to how much consumers will shell out even now when favoring goods over services; although all the attention of the general public has been laser-focused on just one end. The goods economy was artificially stimulated and even then it still could not propel total consumption activity beyond its previous baseline.

It’s already a red flag with now two bad quarters in a row.

And those same two weak quarters also extended, importantly, to business investment. Private real non-residential fixed investment rose only 2.0% in the third to fourth quarters (SAAR) after gaining only 1.7% in the second to third quarters.

Like the above rates for final sales and those for consumer spending, these are significantly down from the two quarters to start last year, those specifically filled with federal government allowances.

Without government at its peak, the economy is quite different.

Private real non-residential fixed investment

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Excluding stocks, most of which were also imported, the US economy in the second half behaved exactly the way the bond market had tilted. Expectations of longer-term yield growth and inflation declined even as CPI rates accelerated, leading to pressure from the Fed on upcoming rate hikes, which distorted the short term.

Since January 4 alone, the spread between the nominal 10-year Treasury yield and the nominal 5-year yield has fallen 14 basis points from an already low of 29, hitting a new recent low of only 15 today. The 2s10 spread has collapsed 26 basis points over these same sixteen trading sessions, falling to 63 now after the close of business today.

UST yield curve

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UST yield curve

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This “growth scare” is everywhere in these GDP figures, further supported by the one segment that created the upside surprise in the Q4 headline rate. Such a dose of unsold goods, with more on the way, combined with what appears to be a distinct downturn across the broader economic landscape (especially as the noise of government helicopters fades away in background) does not bode well in the short to medium term.

This does not mean that recession is fast approaching, but rather that the chances of inflation have seriously diminished alongside the significantly increased downside risks (to some extent) for the overall and global economy.

No wonder the end of the yield curve has completely collapsed recently. The Fed is becoming more adamant about its rate cut and hikes based on the unemployment rate (already proven flawed) while stocks and ongoing economic weakness of all kinds only further inflame “fear of the growth”.

A real conflict of interest (rate).

The real GDP problem

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The real GDP problem

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.