US DATA: GDP Demand Details Stronger Than Headline Reading Suggests

Q4 GDP growth missed expectations at 2.3% Q/Q annualized (vs 2.6% survey, 3.1% prior, though exactly in line with yesterday's Atlanta Fed GDP Nowcast), the weakest in 3 quarters, with the headline PCE price deflator was on the soft side (2.2% vs 2.5% expected). But this was a stronger advance report for the quarter in multiple respects.

• Core PCE prices were in line (2.5%), and underlying demand growth appeared strong, including real personal consumption growing 4.2% (3.2% expected), the best since Q1 2023 and the 3rd consecutive acceleration (1.9% Q1, 2.8% Q2, 3.7% Q3).
• As we have been noting in monthly PCE and retail sales reports, real goods consumption is picking up strongly, rising 6.6% for the quarter, the fastest since Q1 2023 - Services PCE was solid at 3.1% but this was more of an uptick from the previous two quarters' average of 2.8%. The BEA noted strength in health care servicves spending, with goods fuelled by recreational goods and vehicles/parts. Government consumption and investment pulled back slightly, on account of a dip in defence spending.
• One disappointment here was that fixed investment was soft (mild contraction in non-residential investment), shrinking 0.6% - the first drop since Q4 2022 - led by the first drop in non-residential investment since Q3 2021. As expected, residential investment rebounded from a contractionary Q3.
• Overall final sales to domestic purchasers, both private and overall (each 3.1% Q/Q vs prior 4-quarter average of 3.2%) showed no sign of deceleration.
• Inventories subtracted 0.9pp to GDP growth, the most since Q1 2023, but this is not seen as a signpost for economic activity.
• If anything, net exports were less of a drag than expected, actually adding slightly to GDP for the first quarter in 4 vs Atlanta Fed GDPNow's expectation of a -0.6pp contrib which looked plausible after December's goods trade figures surprised with a big deficit widening.
• This is a solid report in terms of underlying demand, and will reassure the Fed that the economy continues to grow at a "solid pace", per the January FOMC statement. Indeed the 2.5% Y/Y Q4 is exactly in line with the FOMC's December projection.