Below we highlight key changes in this morning’s second reading of Q4 2014 US GDP, including Q3 figures as well. As shown, there was a downward revision to headline growth from 2.6% on a quarter-over-quarter, seasonally adjusted annual rate basis t0 2.2%. This appears bad at first, but the guts of the report reveal that the key drivers of growth (consumption and investment) were either the best part of unchanged or revised upwards. The significant weight of net trade on growth in the first reading was revised to an even worse position, but most of this was made up for by stronger state government spending. We would also note that both exports and imports were revised up; this is the best way to see the trade gap widening, as it signals global demand isn’t weakening. The real action for this report was within the Investment category: fixed investment was revised up as nonresidential spending (primarily capital investment by business) expanded more than previously expected. The only true weakness in the whole report was inventories, which still grew quarter-over-quarter, but much slower than expected, shaving 70 bps off of growth.
Lower inventory accumulation is the best-case scenario for downgrades to growth, as it represents a smaller pull-forward of demand from the future. After stripping out exogenous factors like government spending, trade, and inventories, domestic final private demand expanded at a 3.55% QoQ SAAR rate. That’s the fastest since at least Q1 2011, and an excellent pointer that the last three quarters of 2014 represent the economy at a different gear than we have seen yet in the recovery. Whether that shift up will be maintained is unclear given data we’ve gotten so far in 2015, but this report has no evidence that growth is poised to slow.