U.S. real GDP rebounded solidly in H2 after historic H1 decline

*U.S. real GDP increased by 4.0% q/q annualized (BCM: 3.5%, consensus: 4.2%) in Q4 (+1.0% q/q non-annualized), placing it just 2.5% below its pre-pandemic level, reflecting the strong recovery following the historic 31.4% q/q annualized decline (-9.0% q/q non-annualized) in Q2 (Charts 1 and 2). Nominal GDP, the broadest measure of current dollar spending in the economy, increased by 6.0% q/q annualized in Q4 (+1.5% q/q non-annualized) – placing it 1.2% below its Q4 2019 level – as the GDP price index increased by 2.0% q/q annualized.

*Real residential fixed investment surged by 33.5% q/q annualized in Q4 2020, lifting it 13.7% above its Q4 2019 level. Real consumption (+2.5% q/q annualized) and business fixed investment (+13.8%) increased in Q4 but remained below their pre-pandemic levels. Government purchases declined for the second consecutive quarter (-1.2% q/q annualized). See Charts 3-6. A significant widening of the trade deficit subtracted 1.5pp from Q4 real GDP growth, while inventory investment added 1.0pp to growth (Charts 7-8).

*The slowdown in economic activity in December resulting from the intensification of the pandemic was milder than initially feared (and concentrated in certain services sectors), setting a solid starting point for activity in 2021. We expect economic growth to accelerate this year as vaccines become more widely distributed and pent-up demand is released. Production and imports should continue to rise solidly, as businesses replenish inventories. High frequency data indicate that U.S. mobility trends have already started to increase, following months of declines, as new COVID-19 cases and hospitalizations have fallen (Real-time insights, economic and financial pulse, January 25, 2021).

Real consumption, which accounts for 68% of GDP, is now only 2.6% below its Q4 2019 level, reflecting the robust recovery in goods consumption (+7.0% above its pre-pandemic level) that has been offset by depressed services consumption (-6.8% below its pre-pandemic level). See Chart 9. Goods consumption was boosted by the very generous government income support programs and the shift to stay-at-home. We expect services consumption to rebound solidly once the pandemic ebbs, government imposed restrictions are loosened, and persons choose to resume normal activities. We expect this bounce-back in services consumption – which accounts for 67% of total consumption – to drive strong growth in total consumption in 2021. Consumption will be supported by the sizable cumulative excess savings and generous government income support (Chart 10).

Residential fixed investment is being boosted by historically low mortgage rates, the tight supply of homes on the market, and the shift to stay-at-home that has increased demand for bigger homes and home improvement projects. All components of residential investment registered strong gains in Q4: single-family and multifamily construction (+63.8% q/q annualized), brokers’ commissions (+28.7%), and home improvements (+9.5%). See Chart 11. We expect strong growth in housing activity again in 2021 as long as mortgage rates remain low. The strong momentum in housing activity has lifted residential construction employment above its December 2019 level, outperforming the recovery in overall employment (-6.5% below its pre-pandemic level). Favorable demographics will drive housing demand in the intermediate run.

Business fixed investment is just 1.3% below its pre-pandemic level, reflecting the strong bounce-back in equipment investment (+3.4% above its pre-pandemic level) and continued solid growth in intellectual property products (IPP) investment (+1.4% above Q4 2019 level) offset by depressed structures investment (-14.1% below its pre-pandemic level). See Chart 12. We expect equipment investment in 2021 to be boosted by investment in aircraft and parts as the idiosyncratic issues that have plagued the sector for years have eased. Stronger growth in investment in the oil and gas sector will lift structures investment.

Government consumption expenditures and gross investment fell below its pre-pandemic level in Q4 (‑-0.4%). In 2020, growth in federal government purchases (+4.4%) offset the decline in purchases by state and local governments (-0.9%) whose finances have been severely squeezed by the pandemic (Chart 13). State and local government employment is currently 1.4m below its pre-pandemic level. Government purchases in 2021 will be boosted by the COVID-19 relief legislation enacted in December and the additional vaccine and healthcare spending proposed by the Biden Administration. Note that government purchases do not include the government’s income support transfers to individuals or its loans/grants to businesses.

Net exports subtracted 1.5pp from real GDP growth in Q4 as growth in imports (+$213 billion) almost doubled growth in exports (+$111 billion). See Chart 14. With the inventories-sales ratios and retailers and wholesalers still extremely low, we expect businesses to continue rebuilding inventories by ramping up imports. Exports will recover as global growth improves.

The Fed’s preferred measure of prices, the PCE price index, increased by 1.5% q/q annualized in Q4, leaving its yr/yr change at 1.2%. Core PCE (excludes food and energy) inflation (yr/yr) was also unchanged at 1.4% (Chart 15). Both inflation measures remain well below the Fed’s 2% inflation target. Inflation will temporarily jump in Q2 2021 due to base effects from the sharp decline in prices during March-April-May 2020, then rise on a more sustained basis starting in Q3 as pent-up demand is released and services activities recover.

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Roiana Reid, roiana.reid@berenberg-us.com

Member FINRA & SIPC
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