By Ken McCarthy, Principal Economist, Applied Research Lead
#1. The report is not as bad as the headline suggests. A big reason for the slowdown in GDP growth was less inventory accumulation and a wider trade deficit. If those factors are removed, we get what economists call final sales to domestic purchasers. Final sales increased at a 1.8% annual rate, nearly three times as fast as GDP. For the year 2015 final sales increased 2.8%, the strongest growth since 2005. Final sales have been stronger than GDP in each of the last two years.
#2. As the inventory runoff ends, as it likely will in the first half of 2016, GDP growth will accelerate. Consumer spending is healthy. In Q4 it increased at a 2.2% annual rate and for the year it rose 3.1%. If consumers continue to increase spending at this pace, inventories will have to be replenished leading to a rebound in manufacturing and more hiring.
#3. The biggest worry in the GDP report was the decline in business investment. In the fourth quarter nonresidential fixed investment, the broadest measure of business spending declined at a 1.8% annual rate. For 2015 as a whole investment spending increased at the slowest pace since 2010. While part of this is clearly being driven by consolidation in the oil and gas industries, there was also a slowdown in spending on information technology and transportation equipment. The worry is that this slowdown reflects a reduction in business confidence. The decline in global equity markets since the beginning of the year will not improve that confidence. If businesses are less confident, they will be more cautious in committing to lease space and increase employment. While we believe the volatility is temporary and the underlying fundamental drivers of economic growth in the U.S. remain solidly in place, business confidence will bear close watching in the weeks and months ahead.
#4. Another important positive for the economic outlook has been the strong growth in after tax income. In the fourth quarter inflation adjusted after tax income grew at a 3.2% annual rate, capping a year that saw the fastest income growth in nearly a decade (since 2006). The income growth has been caused by a combination of strong job growth and steady growth in wages. In 2016, we anticipate that employment growth, while slowing, will still be healthy and well above the long term average. In addition, wage growth is likely to accelerate as labor markets continue to tighten. So we expect income growth to remain strong. This should continue to drive consumer spending growth at a solid pace. The result is likely to be rising demand for retail and industrial space as consumers purchase goods and services through multiple channels.
#5. Overall the GDP report is much more positive than the headline numbers suggest. We believe it supports our view that the economy will expand more strongly in 2016 than it did last year. A rebound in inventories driven by strong growth in consumer spending should boost GDP. Thus demand for commercial real estate is expected to remain reasonably healthy and vacancy will continue to tighten in most markets. But let’s keep a close eye on business confidence. If market volatility causes this to flag, growth may not be as strong as we currently anticipate.
Ken has been with Cushman & Wakefield since August 2006. As Principal Economist, he works with the Chief Economist on Cushman & Wakefield’s U.S. economic position and presents it to the public. As Applied Research Lead, Ken is responsible for preparing cutting edge research about the outlook for commercial real estate in the Americas.
Be sure to follow Ken’s latest economic updates @KenMcCarthyecon