Executive Summary
In Q1 ‘24, the US Real GDP QoQ growth lowered to 1.6%. Demand for durable goods declined -1.20% while services surged 4%. Slower demand for goods contributed to the decline of the Output gap from 0.82% to 0.67%. If the Fed continues to see a declining output gap that could turn negative, interest cuts will soon occur. In conclusion, holding or buying the S&P 500 and avoiding the discretionary sector is our recommended investment strategy as, last quarter, the US GDP declined but did not turn negative.
Why Investors and Traders Should Care About the US GDP!
Gross Domestic Product (GDP) is the best measure of a country's economic activity as it measures the total market value of all newly produced final goods and services in that country during a year. As the main leading economic indicator, GDP can help forecast companies' earnings and economic recessions. Remember that GDP does not record the informal sector (black market). This report breaks down GDP using the expenditure method which adds up all the domestic spending ― consumption, government expenditure, investments, and net export (export-import). This is just the first version (advance report) of the GDP; two more revisions are to be made ― preliminary and the final report. In conclusion, by the end of this report, investors and traders should have a clearer understanding of the current state of the US economy and where it might be heading next.
Key Points
In Q1 '24, US Real GDP was up 1.6%, QoQ, below the 2.5% consensus estimate; personal consumption expenditures, gross private domestic investment, and government consumption and gross investment were up 2.5%, 3.2%, and 1.2%, respectively. Consumption makes up 69% of the US Real GDP and its services, up 4% QoQ, were the main contributors to the overall personal consumption growth in Q1 '24. Residential investments had the most growth, 13.9%.
Services Boost US Personal Consumption
In Q1 '24, US personal consumption grew 2.5% QoQ. Durable goods declined -1.2% primarily due to a -$13.9B decline in motor vehicles and parts spending; motor vehicles and parts have lost over $32.7B in the last 12 months. 11.4% of total personal consumption goes into durable goods while 21.1% goes into nondurables. Nondurable goods stayed firm, driven by consumer spending on clothing and footwear, up $6.6B QoQ. Lastly, services saved consumer spending from a decline, growing 4% QoQ; household consumption expenditures (for services), health care, and financial services and insurance were the main drivers of services, contributing a combined $137.5B in Q1 '24. Services received 67.5% of consumer spending during the quarter.
Residential Investments Saw Double Digits Growth in Q1 '24
US private domestic investment grew 3.2% in Q1 '24 with most of its fixed investment capital going towards residential and intellectual property products. QoQ, residential, and intellectual property products increased 13.9% and 5.4%, respectively; intellectual property was driven by software investments which saw a $20.2B increase. 22.7% of total fixed investments went into residential such as houses and apartments.
Only 17.3% of the Total US Government Capital is Allocated to Gross Investments
In Q1 '24, US government spending grew 1.2%, with most of its growth coming from state and local expenditures and investments ― 2%. State and local gross investment ― highway construction, public buildings, and military equipment ― grew $1.8B to $452B; on the other hand state and local consumption expenditures grew $10.3B to the massive $1,944B which includes national defense, public education, law enforcement, and public healthcare. In Q1 ‘24, the annualized US government spending was $3,899B of which only 17.3% went into gross investments at federal, state, and local levels.
A -$846B Trade Deficit
In Q1 '24, the US reported a negative net export of -$846B due to the 6.8% and 9% increase in imported goods and services, respectively. The US is a positive net seller of exported services, $290B, and a negative net seller of exported services at around -$1,136B.
A Positive Output Gap
In Q1 '24, the output lowered from 0.82% to 0.67%, representing a cooling off in a booming economy. Demand for services is still surging while it has slowed down for goods; this is important because consumption is 69% of the US GDP. Lastly, the Fed usually starts to cut interest rates in anticipation of a declining output gap turning toward negative.
Investment Analysis
The US GDP showed a strong demand for services, and a strong capital inflow for residential, and intellectual property products. The downtrend in motor vehicles and parts is a bearish signal for some motor vehicle stocks. Avoid discretionary stocks, and rotate to the S&P 500 and health care.
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