Summary: US GDP up 0.7% (2.9% annualised) in December quarter, above expectations; consumer spending main engine of growth but momentum slows; GDP price deflator rate falls from 7.1% to 6.3%.
US GDP growth slowed in the second quarter of 2019 before stabilising at about 0.5% per quarter. At the same time, US bond yields suggested future growth rates would be below trend. The US Fed agreed and it reduced its federal funds range three times in the second half of 2019. Pandemic restrictions in the June quarter of 2020 sent parts of the US economy into hibernation; the lifting of those same restrictions sparked a rapid recovery which lasted until 2022.
The US Bureau of Economic Analysis has now released the December quarter’s “advance” GDP estimates and they indicate the US economy expanded by 0.7% or at an annualised rate of 2.9%. The increase was slightly more than the 0.6% increase (2.6% annualised) which had been generally expected but slightly less than the September quarter’s 0.8% after revisions.
“Consumer spending was the main engine of growth, although [it] continued to show slower momentum [while] residential investment remained in a deep hole and business investment remained sluggish,” said NAB economist Tapas Strickland.
US GDP numbers are published in a manner which is different to most other countries; quarterly figures are compounded to give an annualised figure. In countries such as Australia and the UK, an annual figure is calculated by taking the latest number and comparing it with the figure from the same period in the previous year. The diagram above shows US GDP once it has been expressed in the normal manner, as well as the annualised figure.
US Treasury bond yields rose on the day. By the close of business, the 2-year Treasury bond yield had gained 6bps to 4.18%, the 10-year yield had added 4bps to 3.49% while the 30-year yield finished 5bps higher at 3.64%.
In terms of US Fed policy, expectations of higher federal funds rates over the next 12 months firmed slightly. At the close of business, contracts implied the effective federal funds rate would average 4.58% in February, 25bps higher than the current spot rate, and then climb to an average of 4.65% in March. May futures contracts implied a 4.89% average effective federal funds rate while December contracts implied 4.52%.
One part of the report which is often overlooked are the figures regarding the GDP price deflator, which is another measure of inflation. The GDP price deflator is restricted to new, domestically-produced goods and services and it is not based on a fixed basket as is the case for the consumer price index (CPI). The annual rate fell from the September quarter’s figure of 7.1% to 6.3%.
