Reflections on US GDP numbers
0The most significant aspect of the US fourth quarter GDP report was the weakness in nominal demand. Nominal final sales rose by only 1.2%, among the weakest quarters in the past 50 years and the weakest non-recession quarter in that period.
Nominal final sales represent nominal demand, which is the amount of money spent on stuff produced in the US and drives nominal income.
What we know is that in a de-leveraging phase, it is necessary to get indebtedness down relative to income. This can involve on one side of the equation raising income relative to the level of debt, and rapid growth in nominal income does ease the pain of de-leveraging and speeds the process of addressing imbalances. In contrast, slow growth in nominal income makes the de-leveraging process more painful, with a greater incidence of defaults, and a slower rate of resolution.
If sustained, a low nominal spending environment reinforces the likelihood of zero interest rates and intermittent QE being required for many years, stretching out perhaps for decades.
It’s worth noting that US nominal demand in the fourth quarter would have been even weaker without the decline in the savings rate and we cannot expect declines in the savings rate to act as a continuous spur to spending – indeed with de-leveraging we would expect the savings rate to climb, constraining spending growth.
For the record, the 1.2% growth in nominal final sales breaks down into a weak 0.8% growth in real final sales and a paltry 0.4% rise in the sales deflator.
James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla
