Strong U.S. growth in Q4 was boosted by buildups in inventory; Generation X stepped up in home ownership in Q4; China - U.S. trade tensions eased as growth in China continued to slow; Eurozone manufacturing continued to slide.
“In accordance with the president’s direction… [The U.S. will] suspend the scheduled tariff increase until further notice.”
U.S. economy: Stockpiling growth
Despite worries, economic growth in Q4 came in better than expected at an annualized 2.6% rate. One reason for the upside surprise: growth in inventories. Though explanations for the stockpiling vary, the surprise slowdown in overall activity toward the end of December in holiday shopping and housing – possibly due to changes in consumer behavior in the face of the impending partial federal government shutdown – is one of the suspects. A second reason for inventory growth could be related to a sales slowdown due to trade tensions. Whatever the reason, the Q4 figure contributed to strong year-on-year GDP growth for Q4 at 3.1%, the strongest Q4 finish to any year since 2005.
One possible side effect of any impending trade agreement between the U.S. and China could be a rapid drawdown of inventories as trade resumes – which would have the contrarian effect of reducing GDP growth as a direct result of the good news.
U.S. housing: GenX to the rescue
Home ownership in Q4 rose to the highest level since 2014, led by growth in the share of ownership by purchasers in their mid-30s and early 40s.That rate rose to 61.1% vs. the year-ago Q4 figure of 58.9%. The share for buyers under 35 also rose, but only from 36.0% to 36.5%. Overall, the number of owner-occupied households rose strongly to 1.7 million, the second most since 2005.
Two underlying trends: the population of millennials in prime homebuying age is growing, and slightly older buyers whose credit was damaged by the 2008 crash are now more able to qualify for mortgages as the economy improves.
China and trade: Good timing
The atmosphere surrounding the trade negotiations between the U.S. and China has improved significantly, with an apparent agreement between the parties on currencies and a delay "until further notice" of the round of U.S. tariff increases formerly scheduled to take effect on March 1.
The improvement was welcome, especially in the light of the first official gauge of China's manufacturing sector for February; possibly distorted by the February lunar new year holiday, manufacturing PMI fell further below the break-even 50 mark, dropping to 49.2. On the brighter side, overall new orders improved, despite export orders declining further to 45.2 from 46.5 in January. And non-manufacturing PMI, which reflects activity in the construction as well as services sector, while falling, remained solidly in the expansion range of 54.3.
The month's figures are well-timed, immediately preceding this week's 11-day meetings of China's leadership to set economic policy priorities for the coming year, beginning on March 5.
Europe: Manufacturing pressure
February's eurozone final manufacturing PMI came in at 49.3, down for a seventh straight month, moving into the contraction level for the first time June 2013. New orders also fell, at the fastest rate in nearly six years, backlogs decreased, raw materials purchases fell and hiring remained weak.
In Britain, uncertainties surrounding the impending March 29 deadline for Brexit led to factories stockpiling goods at the fastest pace seen in any G7 country since recordkeeping began in the 1990s. The result: UK manufacturing PMI came at an expansionary 52.0 for February.
All data: Source Bloomberg, as of March 1, 2019, unless otherwise specified.
Generation X, or Gen-Xers, are people ages 36 to 52.
Purchasing Managers Indexes (PMI) measure the manufacturing and services sectors in an economy, based on survey data collected from a representative panel of manufacturing and services firms. PMI greater than 50 indicated economic expansion; below 50, contraction.