Can US Q4 GDP break the recession narrative?


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Amidst all the debate of whether the US is heading into a recession this year, we get the first look at last year's GDP figures. This could be the biggest market moving event of the week, especially if expectations are not met. And there is something of a wide range of forecasts. The Fed's GDPNow tool is saying it will be 3.5%, while the consensus among economists is that it will be 2.6%. That compares to the prior quarter's revised 3.2% result.

But it's important to remember that just as a country can have a "technical recession", it can have "technical growth" as well. One of the main drivers for third quarter GDP growth was an unexpected decline in imports. Meaning that the trade calculation contributed to GDP, but only because Americans were buying less.

It's all inflation's fault

Given the context of high inflation at the time, it's logical Americans were buying less. At the time, the dollar was relatively strong, meaning that imports constituted deflationary pressures. Since then, the dollar has gotten weaker in anticipation that the Fed will stop raising rates. That means imported goods have increased in price, which could technically support a growing GDP figure.

The other interesting factor is that a recent review of leading indicators by the Conference Board showed that all segments of the US economy were decreasing except for two. Those were employment and personal consumption. The unemployment rate remains remarkably low, just a couple decimals off a multi-decade low. But that is likely because it's still dislocated from covid.

Where's the money coming from?

Turning to address the personal consumption factor, Americans have been spending down their savings of late. More worrisome for the long-term resilience of the economy, they have been taking on increasing amounts of debt. Major US banks pointed this out in their latest earnings, as deposits have diminished. Concurrently, net charge-offs (a measure of distressed debt) have been creeping higher, as Americans struggle to pay for their credit cards.

The head of JPMorgan, who's rather pessimistic about the economic future of the US, pointed to the rate of savings among his bank's customers is dwindling and would run out by October of this year. If interest rates remain high, it would be much harder for people to take on debt to continue spending. The largest driver of the US economy, and one of only two positive sectors at the moment, is dwindling.

Gauging the market reaction

The market might not particularly like a good GDP figure, since that would imply the Fed could keep hiking in order to tame inflation. But, even if that hurts stocks, it could give the dollar a bit of a boost. Meanwhile, a disappointing figure could give the markets some relief over rate hikes, as it could be interpreted as a sign that the Fed's forecasts are a little too optimistic, and they might even have to cut rates in the near future.

The Fed meets next week, and there is a pretty solid consensus that there will be just a 25bps hike. This is the last major data point before the meeting, because January NFP figures won't be released until the Friday after the FOMC. Therefore this data could be pivotal for expectations for the Fed.

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