U.S. GDP Includes a Warning Sign: What Does That Mean for Stocks?

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U.S. fourth-quarter GDP growth met economists’ expectations, but consumer spending lagged sharply and may pose a problem for an economy that is late in its cycle.

All three major U.S. indexes fell for most of the trading day Thursday, before turning positive to end the day. 

GDP growth came in at 2.1% for the final quarter, driven largely by strong trade volumes.

President Donald Trump and Chinese leader Xi Jinping signed phase one of a trade deal on Jan. 15. The deal had been expected and lifted business confidence and investment.

But consumer outlays rose just 1.8%, compared with 3.2% in the third quarter and 4.6% in Q2. 

The consumer accounts for roughly 70% of total U.S. economic output and has carried overall growth in the U.S. in the past few years.

Manufacturing activity has been declining on a year-over-year basis since August 2019. Bullish investors hanging their hats on consumer spending don’t want to see people closing their wallets in 2020.

Oh, and while the headline GDP result looked strong, “the devil is in the details,” Mike Loewengart, vice president of investment strategy at E-Trade, told TheStreet.

"Consumer spending cooled in Q4, which is somewhat eyebrow-raising as this is a reflection of the tail end of the holiday season. It doesn’t exactly jibe with what we’ve heard from retail mainstays during earnings season."

“And personal spending data released later this week should give us a more holistic view of consumer health.”

The U.S. stock market dropped a bit on Thursday partly because of continued concern regarding the coronavirus in China. But a sluggish consumer wasn’t helping.

Many stock-market participants recently have been looking for a pullback. The S&P 500 is up roughly 7% in the past three months, and while the average forward-earnings multiple on the index has fallen to 18 from nearly 19, that’s still above the 10-year average of 16.

Many of those calling for a near-term pullback say such an easing would be muted. Interest rates remain low, which could cushion the impact of a stock drop.

The Federal Reserve on Wednesday held rates steady, though the probability of a rate cut in 2020 rose to 17% from 12% just before the Fed met, CME Group reports. Fed Chairman Jerome Powell has made clear that the system will cut interest rates if necessary.

A slowing consumer would certainly hinder inflation, helping enable such a rate cut.