GDP’s Biggest Drop in 74 Years: January 25 – 29

The U.S. economy rebounded further during Q4 but still has a significant way to go. Here are the five things we learned from U.S. economic data released during the week ending January 29.


GDP growth slowed as 2020 ended. The Bureau of Economic Analysis reports that Gross Domestic Product (GDP) expanded 4.0 percent on a seasonally adjusted annualized basis during the fourth quarter of 2020. By “normal” standards, this would be a very strong GDP report, but it pales in comparison to Q3’s 33.4 percent Q3 and it still leaves the U.S. economy 2.5 percent smaller than it was at the end of 2019. Further, the 3.5 percent contraction in GDP for all of 2020 was the worst year for the output measure since 1946. The most significant positive contributors to Q4 GDP growth were (in declining order): exports, nonresidential fixed investment, personal consumption, residential fixed investment, and private inventory accumulation. Drags on the U.S. economy were (in declining order): imports, state/local government spending, and federal spending. The BEA will revise its Q4 GDP data twice over the next two months.

Economic activity picked up in December. The Chicago Fed National Activity Index (CFNAI) added 21-basis points during the month to a reading of +0.52. The CFNAI is a weighted average of 85-economic indicators, indexed such that a reading of 0.00 indicates the U.S. economy is expanding at its historical average. Fifty-three of these indicators made positive contributions to the CFNAI, while the other 32 made negative contributions. December’s rise in the CFNAI resulted from improvements among production-related indicators, which counterbalanced smaller contributions from measures tied to employment, sales/orders/inventories, and personal consumption/housing.

Personal spending again in December as the saving rose. The Census Bureau estimates real Personal Consumption Expenditures (PCE) fell 0.6 percent on a seasonally adjusted basis during the month after slumping 0.7 percent in November. Goods expenditures declined 1.4 percent, split by decreases for durables and nondurables of -1.3 percent and -1.4 percent, respectively. Spending on services slipped 0.2 percent. Nominal PCE (not adjusted for inflation) slowed 0.2 percent. The spending cut occurred despite a 0.6 percent rise in nominal personal and disposable income. Real disposable income advanced 0.2 percent. As a result, the savings rate expanded by 8/10ths of a percentage point to +13.7 percent. The savings rate has been bloated since the start of the pandemic, with 2020 personal savings totaling $2.882 trillion (134.0 percent greater than that in 2019). Over the past year, disposable income has risen 3.3 percent while personal spending fell 3.3 percent.

The Fed stays the course. The policy statement released following the conclusion of the past week’s meeting of the Federal Open Market Committee was a near facsimile of that from the mid-December meeting. It did note that economic activity had moderated “with weakness concentrated in the sectors most adversely affected by the pandemic.” Further, Committee members said that the course of the pandemic and vaccinations will determine the pace of the recovery and that the “public health crisis” “poses considerable risks to the economic outlook.” As a result, the FOMC voted unanimously to keep the fed funds target rate at near-zero percent and continue purchasing $120 billion in a combination of Treasury securities and mortgage-backed securities each month.

Consumer sentiment barely budged in January. The Conference Board’s Consumer Confidence Index added 2.2 points during the month to a seasonally adjusted 89.3 (1985=100). Even with the same gain, the measure remained well below its year-ago mark of 130.4. The present conditions index lost 2.8 points to 84.4, while the expectations index rose 5.5 points to 92.5. A mere 15.8 percent of survey respondents viewed current economic conditions as “good,” while 42.8 percent saw them as “bad.” Related, 20.6 percent of consumers described jobs as being “plentiful” compared to 23.8 percent who reported them to be “hard to get.” The press release noted that the data suggest “consumers foresee conditions improving in the not-too-distant future.”

The University of Michigan’s Index of Consumer Sentiment shed 1.7 points to a seasonally adjusted 79.0 (1966Q1=100). The index was off 2/10ths of a point from the preliminary January reading reported a few weeks ago and reflected a sharp 20.8 point slump from a year earlier. The current conditions index lost 2.3 points to 86.7 (January 2020=114.4), while the expectations index slipped 6/10ths of a point to 74.0. The press release indicated that sentiment would be worse if not for “wearing masks and social distancing, the quick substitution of home for office work, and the prompt distribution of generous federal benefits.”

Other U.S. economic data released over the past week:

  • Jobless Claims (Week ending January 23, First-Time Claims, seasonally adjusted): 847,000, -67,000 vs. the previous week, +635,000 vs. the same week a year earlier). 4-week moving average: 868,000 (+308.0% vs. the same week a year earlier).
  • Durable Goods (December 2020, New Orders, seasonally adjusted): $245.3 billion (+0.2% vs. November 2020).
  • New Home Sales (December 2020, New Homes Sold, seasonally adjusted annualized rate): 842,000 (+1.6% vs. November 2020, +18.8% vs. December 2019).
  • Pending Home Sales (December 2020, Index (2001=100), seasonally adjusted): 125.1 (vs. November 2020: 125.9, vs. December 2019: 103.4).
  • FHFA House Price Index (November 2020, Purchase-Only Index, seasonally adjusted): +1.0% vs. October 2020, +11.0% vs. November 2019.
  • Case Shiller Home Price Index (November 2020, 20-City Index, seasonally adjusted): +1.4% vs. October 2020, +9.1% vs. November 2019.
  • Bankruptcy Filings (2020, Business and Nonbusiness Filings): 544,463, -29.7% vs 2019.
  • Agricultural Prices (December 2020, Prices Received by Farmers): -1.8% vs. November 2020, +0.3% vs. December 2019.

The opinions expressed here are not necessarily those of Kevin’s current employer. No endorsements are implied.

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