Fourth Quarter GDP Not as Weak as Headline Suggests

The increase in real GDP in Q4 was a bit weaker than expected.
However, the headline number was pulled down by a sharp inventory
swing, which lays the groundwork for solid GDP growth in the first
part of 2011.

*Sharp Inventory Swing Helped to Depress Headline Growth Rate*

Real GDP rose at an annualized rate of 3.2 percent in the fourth
quarter. The recovery that started in the third quarter of 2009 has
transitioned into an expansion as the level of real GDP is now higher
than the pre-downturn peak in Q4-2007.

On the surface, the fourth quarter's GDP growth rate was a tad
disappointing as the consensus forecast had anticipated a growth rate
of 3.5 percent. However, the headline number belies underlying
strength. Notably, real consumption expenditures shot up 4.4 percent,
the strongest annualized rate of growth in nearly five years. The 21.6
percent surge in consumer purchases of durable goods (i.e., "big
ticket" items) indicates that some pent-up demand for durables may
have been worked off in the fourth quarter. Although we expect that
the growth rate of consumer spending will downshift a bit over the
next few quarters, we do not look for consumer retrenchment á la late
2008 in the wake of the global financial crisis.

We were a bit surprised by the sluggish growth rate in business fixed
investment spending, which was up only 4.2 percent. However, the
apparent slowdown follows two consecutive quarters of double-digit
growth, and we look for growth in capital spending to remain solid in
2011. Exports were another source of strength, rising 8.5 percent
during the quarter. On the other hand, imports fell 13.6 percent,
representing some payback for the 16.8 percent growth rate that was
registered in the previous quarter.

In our view, the most notable feature about the GDP data was the sharp
swing in inventory accumulation. Inventories rose at an annualized
rate of $121 billion in the third quarter but only $7 billion in the
final quarter of 2010. This dramatic reduction in the rate of
stock-building sliced 3.7 percentage points from the headline GDP
growth rate, the largest negative contribution from inventories in
more than 20 years.

The economy ended last year on a rather strong note, giving it a fair
amount of momentum entering 2011. Indeed, real final sales shot up 7.1
percent in the fourth quarter. Although this growth rate will likely
slow over the next quarter or two, the economy will probably get some
boost from inventories as the swing in stock-building in the fourth
quarter was very dramatic.

The 3.2 percent growth rate that was reported this morning likely will
be revised as the BEA gets more information about inventories and
international trade over the next few weeks. However, there is
increasing evidence that the recovery that began in the summer of 2009
is starting to morph into a self-sustaining expansion.

Source: ActionForex.Com