US GDP growth slows in Q4 mainly due to inventories and net exports

US Q4 2015 GDP grew at an annualised rate of 0.7%, as compared with the growth of 2% in Q3, 3.9% in Q2 and 0.6% in Q1, and is on par with market expectations. This indicates that growth in H1 2015 averaged 2.3% and in H2 it averaged 1.3%.

The slowdown in the fourth quarter was mainly due to net exports and inventories. In H1 2015, net exports deducted 0.4ppts from growth, whereas it subtracted 0.2ppts in H2. Domestic demand grew 2.4% in Q4 2015, 2.7% in H1 and 2.2% in H2. In Q4 2014, the GDP grew 3.1% at annualised rate.

Consumer remains the centre for growth outlook, while the consumer's discretionary spending capacity's key is the real income growth. The BLS' Employment Cost Index (ECI), showed a moderate rise in nominal wages and total compensation, both of which grew 0.6% in Q4. Nominal wages rose 2.1% y/y, while total compensation grew 2% y/y. Given that the headline inflation is only 0.4% yr, this indicates a good real income gains for 2015.

However, consumption growth has decelerated to an annualised rate of 2.2% in Q4 from 3.6% in Q2. The slowdown is due to weaker momentum for non-durables and durables. Meanwhile, growth in services continued to have a similar rate throughout 2015. The slowdown in consumption growth might be because the pent-up demand has been filled and is getting renewed. There is also a possibility that the consumers' awareness of risk has increased by the first step toward normalisation of rate.

Even though the overall outlook is optimistic, the consumers might want to see how the policy shift will impact their financial position before boosting their discretionary spend. However, US corporate continue to be unwilling to invest in new capacity. Investment growth has declined below the depreciation rate. This is partially due to the decline in oil price.

However other factors for decline in investment growth are weak global growth, strengthening of the US dollar, concerns regarding the interest rate normalisation and the wild card, which is a continued focus on financial efficiency and revenue growth. Altogether, the above point out towards a weak business investment in 2016. Therefore, the US economy's aggregate growth trend will continue to rely on consumer.