USA – Inventory Gains or Real Growth?

The second preliminary Q4 release showed that the US economy advanced slightly more strongly than initially reported – despite individual components in the report being revised downward. Instead of a 0.7% (q-o-q annualized) advance in GDP growth, it rose by 1.0%. This was still down from the 2.0% figure posted in Q3 2015 and 3.9% jump in Q2. However, most of the upward momentum in Q4 came from business inventories which were upgraded from US$68.6bn to US$81.7bn. Elsewhere, real disposable personal income was revised down in both Q3 and Q4 2015, from 3.8% and 3.2% (q-o-q annualized) to 3.2% and 2.5%, respectively. Other revisions were small: personal consumption growth was moderately reduced from 2.2% in Q4 to 2.0% while business investment now stands at -1.9%. The concern amongst economists is that the gain from inventories might not be sustainable; usually there is an inventory correction which follows a build-up in stocks. Going into 2016, this may have been a more severe correction than initially anticipated. Moreover, according to the national accounts, other drivers were sluggish. The US dollar’s rise against other currencies has hurt export-oriented industries, while the downturn in the oil sector has hit capital expenditure as companies scale back on drilling operations and manpower. In addition, renewed financial market volatility coupled with the downturn in international demand is impinging on the outlook.

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