Given the circumstances, the release of US Q4 GDP figures later today is likely to be one of the biggest market events of the month.
After the whipsaw of contraction in growth in the middle of the year, economic activity is expected to have returned to more “normal” levels.
However, there is enormous uncertainty about what the results could be. This means that the market reaction could be quite big. On top of that is how the different GDP scenarios could impact policy, and where markets might be heading in the future.
The consensus among analysts is that the US GDP grew 3.2% on an annualized basis during the fourth quarter.
Unlike most other countries, the US publishes its growth rate projected over a whole year. That means to obtain the quarterly growth rate, you have to divide the result by four.
3.2% annualized growth in normal circumstances would be quite positive. But after the effects of the pandemic, projections are for the US GDP to be lower than it was at the end of 2019.
That means that annual growth will come in negative.
The Potential Scenarios
Although most economists agree that the Q4 GDP will show growth, it could still come in negative.
This would catch the market by surprise, and likely strengthen the dollar as analysts adjusted their outlook. But the expectation of more stimulus spending would likely support the stock market.
The explanation is simply covid and the lockdowns, which came back into effect as cases spiked. Consumer spending declined in both November and December, the key months for holiday spending.
And stimulus spending didn’t arrive until after the quarter was pretty much over.
The Other Indicators
The balance of data, however, points towards growth coming in at the upper end of projections.
So far, corporate reports have shown many major businesses across the US having results exceeding expectations.
Many large chain retailers saw increases in comparable sales as they offset a drop in consumer spending by taking on larger market share as small businesses remained closed.
The most recent business survey from Yelp showed that business closures had reversed their trend, with most small businesses having a positive outlook for the next six months.
The evolution of the economy has been very uneven, as well.
While consumer service spending has naturally declined as many businesses had to close, durable goods spending, such as in vehicles, and in homes has skyrocketed.
In fact, new home sales are the highest they’ve been since before the sub-prime crisis. This is because people are rushing to take advantage of lower mortgage rates.
Trade to Weigh on Results
In an ironic twist, the US’ relative resilience in the face of the pandemic is likely to contribute to a lower GDP.
This is because exports have fallen more than imports as other countries have had a harder time economically dealing with the virus. This has led to the US having record trade deficits in the last couple of months.
In the end, it’s not just the headline number that matters. It’s also why growth came in at a certain rate.
The market is likely to be less happy if GDP beats expectations because the residential housing market has started to overheat because that implies potential Fed intervention.
Better than anticipated consumer demand is likely to make the markets much happier, even if the overall number is smaller.
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