TD Securities’ Global Strategy Team reviews recent US data, noting Q4 GDP growth slowed to 1.4% and was dragged by weaker government spending, while core GDP (PDFP) also lost momentum. The bank highlights a deceleration in US consumer spending and an upside surprise in December core PCE, but expects some mean reversion and moderation ahead.

Growth slows as inflation runs firm

"GDP growth surprised expectations to the downside in Q4, registering a soft 1.4% q/q AR expansion (2.2% y/y). Owing to the Oct/Nov shutdown, the main driver behind weaker GDP growth was government expenditures, which fell 5.1% q/q AR, shaving off 0.9pp from headline growth. We expect this impact to mean-revert in Q1."

"As usual, the cleaner read for economic activity in any given quarter is core GDP growth (PDFP) which excludes gov't, net exports, and inventories. This segment lost some momentum in Q4, advancing 2.4% after registering firmer 2.9% expansions in Q2 & Q3."

"As expected, the US consumer lost speed in Q4, rising largely in line with expectations (2.4% q/q AR vs 3.5% in Q3). The deceleration reflected a modest contraction in goods spending, as services outlays remained firm at 3.4%. The US consumer appears to be throttling down spending at the start of the year and ahead of the distribution of tax refunds."

"Core PCE inflation surprised to the upside, rising 0.36% m/m. Headline was also 0.36%. This is above our forecast of 0.25% and 0.27%, respectively (consensus: 0.3% for both)."

"Overall, we would not overreact to the surprise here (this is mainly just an accounting of data we have already received). We were expecting an acceleration from the abnormally weak November data, and we expect a moderation in January based off the CPI data we received (TD: 0.19% core, 0.12% headline)."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)