Bill Cheney, John Hancock Financial, Chief Economist comments on the Q4 GDP Report
The Q4 GDP report is positive and very welcome news. Going beyond the startlingly high headline 5.7% growth rate, which is an inventory story, we see other components struggling back.
First, however, with inventories still shrinking there's undoubtedly room for another few quarters of positive news. It would be easy simply to discount the massive 3.4% contribution inventories made to this quarter’s GDP growth. We all know the boost will fade. Yet it would be a mistake to ignore this part of GDP—in the meantime, it is a genuine boost for factories, distributors, transportation, etc (even if around 30% of goods are probably imports).
The economy’s engine is running, but to some degree we’re still in a ditch spinning our wheels. With fiscal and monetary fuel running out, we need job growth to get us firmly on the road to recovery. The signs point to it happening, but that remains a pious hope rather than a growing reality.
Nevertheless, we see reason for optimism.
- Final sales accelerated from 1.5% to 2.2%; this is the trend that counts.
- Business fixed investment (capex) grew 2.9%, after 5 straight quarterly declines. This includes -15% for buildings and +13% for equipment/software. I expect that both these trends will continue.
- Residential investment (housing) remained positive, even if +6% is lower than Q3's +19%. We have plenty of room for growth before we reach even a low sustainable pace of construction, improvement and renovation. Trend new household formation in the US is about 1.3 million per year, plus some post-recession catch-up.
- Consumer spending slowed down only modestly, far less than the decline in auto salesafter the expiration of cash for clunkers. In other words, when people stopped buying cars, they spent their money on other things. The saving rate barely moved (from 4.5% all the way up to 4.6%), suggesting that as long as incomes rise, spending should follow. Incomes did rise, with real disposable income up 2.1% after a drop in Q3.
- Exports grew 18% for the second quarter in a row. The level is still well below its previous peak, which may be bad news in terms of exporters' need for new capacity, but certainly leaves room for further rapid growth if the rest of the world stays on track.
- Defense spending was actually down 3.5% in Q4. Perhaps that's true, or perhaps it will be revised up, but it certainly will not keep falling.
Operating as Manulife Financial in Canada and Asia, and primarily through John Hancock in the United States, funds under management by Manulife Financial and its subsidiaries were Cdn$436.5 billion (US$407.1 billion) as of September 30, 2009.
For more information, visit http://www.johnhancock.com/
