America’s Economy Defies the Doubters … Again!

Q4 GDP grew but slowed from Q3, and here is our weird take: Q4 was no letdown. Sure, headline growth slowed from 4.9% annualized to 3.3%, but inventories and the government did less of the heavy lifting and some more meaningful components picked up.^[i] Even better? There is little optimism that things will keep chugging along. This disconnect suggests stocks entered 2024 with a nice economic wall of worry to climb.

Exhibit 1 shows the underlying positives by breaking out various components’ contributions to headline growth in Q3 and Q4. As you will see, consumer spending contributed a smidge less as slightly slower growth in goods spending offset a mild acceleration in services. But business investment and exports gained some steam. Inventories, meanwhile, contributed much less than they did in Q3. That isn’t assuredly negative, though, considering slimmer inventory growth could simply mean more restocking ahead.

Exhibit 1: Breaking Down GDP

Source: FactSet, as of 1/25/2024.

Overall, the three main private-sector components (consumer spending, residential real estate and business investment) slowed from 2.6% annualized in Q3 to 2.2%.^[ii] That is a much milder slowdown than the headline reading suggests, and it points to the economy standing firm in the face of all the alleged headwinds—war, interest rates, etc.—that raged as 2023 wound down. This is a good thing, because angst about these items hasn’t died down. Instead, most of today’s coverage argued their effect was merely delayed. Far fewer people are calling for recession now, but there are plenty of doubters about the trajectory of growth going forward.

This is good. It means expectations haven’t run ahead of reality and skepticism is still baked in. That sets the bar low and raises the likelihood results surprise positively, because things actually look better for businesses and consumers than headlines suggest. Starting with the former, we have now had two years of businesses making cuts in anticipation of a recession that never came. They enter 2024 pretty lean, while resilient global demand is creating expansion opportunities. This points to some likely improvement in business investment looking ahead, even with rates up. How so? Well, banks’ business lending might be slipping lately, but it isn’t clear whether this is due more to banks’ tightening or businesses’ preference to see better terms elsewhere. Private credit loans (think: credit investment funds) showed signs of a strong pickup last year. Corporate bond issuance rose 5.4% last year, outpacing inflation.^[iii] So overall, it looks like businesses still have plenty of access to financing. That is an overlooked plus. If a re-steepening yield curve helps business lending contribute to this later this year, even better.

As for consumers, the tapped-out shopper narrative has looked wrong from the start. Once you adjust for higher incomes and deposits, debt is less burdensome than it was before the pandemic, and spending was fine then. Strong wage growth has cut the relative burden for many households that faced a student loan payment restart in October (and monthly payments weren’t huge to begin with). The savings rate, which has some issues as a metric, is at levels that have been fine historically. And according to some fresh analysis from JPMorgan Chase, its account holders’ balances—adjusted for inflation—are up from prepandemic levels.^[iv] Interestingly, the only cohort to have lower balances are the highest-income folks, who have been spending with gusto. We point this out because people often argue wealthy individuals make household finance figures look better than they should, obscuring a tough reality among normal people that will eventually take a toll. That doesn’t appear to be the case today, at least according to JPMorgan Chase’s data. And with wages still on the rise, consumers should have plenty of bandwidth to keep going.

So in short, even with the GDP slowdown, we see plenty of underlying—and underappreciated—strength. Stocks move not on GDP results, but on the overall gap between reality and expectations over the next 3 – 30 months. Positive surprise is the main force driving markets higher, and there should be plenty of that in the offing, in our view.