U.S. Economy Heads Into 2020 With Steady Growth Fourth-quarter growth of 2.1% reflected boost from trade as exports increased; pace of consumer spending slows
Year-over-year growth of 2.3% was the slowest pace since 2016, but in line with the average pace that has marked the expansion that began in mid-2009. (…) The 2.3% year-over-year growth in 2019 was well below the 3.1% level that the White House projected. (…)
Consumer spending rose at a 1.8% annual rate in the fourth quarter of 2019 from a 3.2% pace the prior quarter, and business investment dropped for the third quarter in a row, while residential investment picked up. (…)
Overall private-sector inventories subtracted 1.1 percentage point from the fourth quarter’s growth rate. A decline in retail inventories, notably at motor-vehicle dealers, came as the United Auto Workers union nationwide strike at General Motors Co. ran through most of October.
Meantime, net exports added 1.48 percentage point to the quarter’s 2.1% growth rate, the largest contribution since the second quarter of 2009. Exports rose at a 1.4% annual rate and imports dropped at an 8.7% pace. (…)
The fourth quarter GDP numbers are notable because of the outsized contribution from net exports and government spending. I inserted black rectangles in this charts to highlight the trend in real private final sales (GDP ex-gov, ex-net exports), showing the declining momentum of the past 2 years. Biz investment has completely stalled while the contribution from consumer spending has gotten gradually smaller.
Net exports had a particularly outsized contribution in Q4 (1.5 points) but that was only because real imports slumped 8.7% annualized in Q4, the worst since the 2009 recession, and “adding” 1.3 points to Q4 GDP growth rate. Real imports in Q4 were down 2.2% YoY with no offset from exports. This is the first time U.S. real imports decline YoY outside of recessions since 1952!
Moreover, imports of consumer goods collapsed 25% a.r. in Q4! Merely an inventory correction? This is not just American consumers as U.S. exports of consumer products contracted at a 13% annualized rate in Q4 (autos: –24% a.r.)
U.S. real exports have been flat for 2 years. Meanwhile, as these KKR charts show, China has diversified its export markets and gained significant market share since mid-2018:
Speaking of the important, if not crucial, U.S. consumer, this morning’s Personal Income and Outlays release was not encouraging. Real disposable income declined in 2 of the last 3 months and was flat overall in Q4. Americans dipped a little into their savings and grew real spending 0.1% MoM in December and +1.6% annualized in Q4 (yesterday’s GDP pegged it at +1.8%). Even real expenditures on Services were weak at +2.0% annualized in Q4 after +2.2% in Q3 and +2.8% in Q2.
Eurozone Growth Hits 6-Year Low as Key Automobile Industry Struggles The eurozone’s economy slowed sharply in 2019 as factories faltered amid weak overseas demand and its key automobile industry struggled to get to grips with a cooling market and the costs of developing a new generation of electric cars.
(…) The European Union’s statistics agency said Friday the eurozone’s gross domestic product—the value of all goods and services produced across the economy—grew 1.2% last year, its weakest expansion since 2013, when the currency area was emerging from its twin government debt and banking crises. (…)
Eurozone GDP rose at an annualized rate of just 0.4% in the three months through December, its weakest expansion since the first quarter of 2013. That slowdown was partly due to a surprise contraction in France, which had performed more strongly in the previous three quarters and grew by 1.2% over the year as a whole. By contrast, Germany’s economy grew by just 0.6% in 2019, while Spain’s economy expanded by 2%. (…)
Speaking Saturday in London, U.S. Treasury Secretary Steven Mnuchin urged Germany in particular to act.
“There are countries that have opportunities to expand fiscal on top of monetary,” he said. “Monetary cannot be the only economic tool.”
However, it is unlikely that eurozone governments will deliver the stimulus for which the ECB and other bodies such as the IMF have called. Their plans for 2020 foresee only a modest increase in spending, and reflect the difficulty of directing budgets controlled by national governments toward the eurozone’s broader purpose.
Mike Pompeo calls Chinese Communist Party the ‘central threat of our times’
- Pompeo in London for talks with British PM Boris Johnson about Huawei’s inclusion in UK’s 5G network providers
- Pompeo restates US stand that Huawei systems could transfer national security information to Chinese intelligence agencies
(…) Despite the US campaign urging its allies to ban Huawei, Britain has chosen to let Huawei take part in noncore components of its 5G network, though it has capped Huawei’s market share at 35 per cent. Pompeo has called on the government to review its decision. (…)
The European Commission also stopped short of a blanket ban the next day, saying EU member states could exclude – or simply restrict – high-risk 5G vendors like Huawei from core parts of their telecoms networks. (…)
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France’s Orange chooses Nokia and Ericsson to deploy its 5G network at home Orange , France’s biggest telecoms company, said it had chosen Nokia and Ericsson to deploy its 5G network in mainland France, as China’s Huawei Technologies faces intense political scrutiny in Europe.
EARNINGS WATCH
As of Wednesday evening, we had 193 S&P 500 company, a 71% beat rate (19% miss rate) and a +4.4% surprise factor. All 11 sectors but one (Industrials at –5.6%) show a positive surprise factor. The 193 companies show an aggregate earnings growth rate of 4.4% on revenues up 2.4%. Margins up!
Q4 earnings are now seen up 0.7% (+3.5% ex-Energy).
Impressive!
Governments launch rewrite of international tax rules
The rise of Amazon (AMZN.O), Facebook (FB.O) and Google (GOOGL.O) has strained existing rules to breaking point because big tech companies can book profits in low-tax countries like Ireland no matter where their customers are located.
Tax officials from 137 governments agreed at a meeting in Paris to launch negotiations on new rules for where tax should be paid and what share of profit should be taxed when big digital and other consumer-facing businesses do not have a physical presence in the market, the OECD said. (…)
“It’s moving fast because what is at stake is a massive trade war,” OECD head of tax policy Pascal Saint-Amans told journalists in Paris.
“This is what we see on a daily basis with the interaction between France and the U.S. and with the interaction between the U.S and the countries that have said they would launch digital services taxes,” he added.
(…) but countries agreed to not deal with it until the technical work was done, Saint-Amans said.
The effective tax rate of S&P 500 companies has been slipping well before tax reform and is now significantly lower than the 21% U.S. statutory corporate tax rate…
An Ode to Luck: Revisiting my Tesla Valuation
If you care, this is from Aswath Damodaran, a Professor of Finance at the Stern School of Business at NYU.