A Few Comments on Q4 GDP and Investment; Worst Year Since WWII Drawdown

Earlier from the BEA: Gross Domestic Product, 4th Quarter and Year 2020 (Advance Estimate)

Real gross domestic product (GDP) increased at an annual rate of 4.0 percent in the fourth quarter of 2020, according to the “advance” estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 33.4 percent.
emphasis added

Real GDP was down 3.5% in 2020 from 2019. This was the worst year since 1946 (WWII drawdown). And other than WWII drawdown, this was the worst year since the Great Depression.

On a Q4-over-Q4 basis, GDP was down 2.5%.

Recession Measure, GDPClick on graph for larger image.

This graph shows the percent decline in real GDP from the previous peak (currently the previous peak was in Q4 2019).

This graph is through Q4 2020, and real GDP is currently off 2.5% from the previous peak.

The advance Q4 GDP report, at 4.0% annualized, was close to expectations.

Personal consumption expenditures (PCE) increased at a 2.5% annualized rate in Q4, down from 41.0% increase in Q3.

The second graph below shows the contribution to GDP from residential investment, equipment and software, and nonresidential structures (3 quarter trailing average). This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.

In the graph, red is residential, green is equipment and software, and blue is investment in non-residential structures. So the usual pattern – both into and out of recessions is – red, green, blue.

Of course – with the sudden economic stop due to COVID-19 – the usual pattern doesn’t apply.

The dashed gray line is the contribution from the change in private inventories.

Investment ContributionsResidential investment (RI) increased at a 33.5% annual rate in Q4.  Equipment investment increased at a 24.9 annual rate, and investment in non-residential structures increased at a 3.0% annual rate (after getting crushed over the previous year)..

The contribution to Q4 GDP from investment in private inventories was 1.0 percentage points.

On a 3 quarter trailing average basis, RI (red) is up solidly, equipment (green) is also up solidly, and nonresidential structures (blue) is down sharply.

I’ll post more on the components of non-residential investment once the supplemental data is released.

Residential InvestmentThe second graph shows residential investment as a percent of GDP.

Residential Investment as a percent of GDP increased in Q4.  

I’ll break down Residential Investment into components after the GDP details are released.

Note: Residential investment (RI) includes new single family structures, multifamily structures, home improvement, broker’s commissions, and a few minor categories.

non-Residential InvestmentThe third graph shows non-residential investment in structures, equipment and “intellectual property products”.  

Investment in non-residential structures declined in Q4 as a percent GDP, and will probably be weak for some time (hotel occupancy is low, office and mall vacancy rates are rising).