skip navigation

Blog

Stay up to date on timely topics and market events. Subscribe to our Blog now.

ECONOMY
January 27, 2022

4Q Real GDP Growth at 6.9% on Surge in Inventory Investment

By Michael J. Bazdarich, PhD

Stay up to date on timely topics and market events. Subscribe to our Blog now.

Real GDP growth in 4Q was estimated today to have been 6.9%, compared to 2.3% in 3Q. The estimate today was in line with the Street forecasts we had seen, but higher than our own expectation of 5-point-something percent growth and even more above the outline we provided three months ago, when commenting on the 3Q data. At that time, we expected 4Q growth to come in in line with what was seen in 3Q, i.e., about 2%.

What happened? Mostly inventories. When discussing the 3Q data, we pointed out that domestic demand had slowed noticeably, but that 3Q GDP was boosted a bit by inventories. Well, the boost to growth in 4Q was much larger even than what we saw in 3Q.

GDP measures total domestic output of goods and services. If you subtract inventory investment from that aggregate, you get total final sales of goods and services (by US merchants, exports being a “final sale” so far as the US is concerned). Subtract foreign trade from final sales, and you get domestic demand: purchases by domestic residents of all goods and services.

In 3Q, real domestic demand grew by 1.6%, but allowing for purchases of imported goods, real final sales grew only 0.1%. Add in the boost from inventories, and you get the 2.3% 3Q GDP growth.

For 4Q, real domestic demand grew 2.1%, pretty close to what we saw in 3Q. Factor in foreign trade, and real final sales grew by 1.9%, a bit better than what we saw in 3Q. Fold in the boost from inventories, and you get the 6.9% growth in GDP.

Exhibit 1: Real GDP and Major Features
Explore Real GDP and Major Features
Source: Bureau of Economic Analysis. As of 31 Dec 21. Select the image to expand the view.

In summary, comparing 4Q to 3Q, domestic demand grew at about the same modest pace, foreign trade was less of a drag, and inventories provided hugely more boost in 4Q than 3Q, a whopping 5% in 4Q. Consumer demand for goods was soft virtually throughout the second half of 2021. Excluding motor vehicles, consumption of goods rose only slightly in 4Q, up 1.3%, not enough to fully offset a 1.5% rate of decline in 3Q.

After a surge in goods spending, consumers have been shifting back to services over the last six months, with total real consumption growing at about the same rate as was seen prior to the pandemic. We expect this to continue in early-2022, with a further slowing possible due to omicron surge effects. Meanwhile, it is hard to see inventories continuing to grow at the same rate as in 4Q.

And if the rate of inventory growth slows any from its torrid 4Q pace, that will result in a drag on 1Q GDP growth. In other words, absent an acceleration in demand, 1Q growth could be well below 2%.

So, surely GDP growth outperformed expectations in 4Q. However, the stage is set for likely much slower growth in 1Q.

© Western Asset Management Company, LLC 2022. This publication is the property of Western Asset and is intended for the sole use of its clients, consultants, and other intended recipients. It should not be forwarded to any other person. Contents herein should be treated as confidential and proprietary information. This material may not be reproduced or used in any form or medium without express written permission.
Past results are not indicative of future investment results. This publication is for informational purposes only and reflects the current opinions of Western Asset. Information contained herein is believed to be accurate, but cannot be guaranteed. Opinions represented are not intended as an offer or solicitation with respect to the purchase or sale of any security and are subject to change without notice. Statements in this material should not be considered investment advice. Employees and/or clients of Western Asset may have a position in the securities mentioned. This publication has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation or needs. It is your responsibility to be aware of and observe the applicable laws and regulations of your country of residence.
Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorized and regulated by Comissão de Valores Mobiliários and Brazilian Central Bank. Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services Licence 303160. Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services Licence for fund management and regulated by the Monetary Authority of Singapore. Western Asset Management Company Ltd is a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan. Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority (“FCA”) (FRN 145930). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK as defined by the FCA. This communication may also be intended for certain EEA countries where Western Asset has been granted permission to do so. For the current list of the approved EEA countries please contact Western Asset at +44 (0)20 7422 3000.