Thursday, March 30, 2006

Both Bullish And Bearish News in "Final" U.S. GDP Report

Today, the "final" (Actually it's not really final as they still can and probably will revise it later, but it's final for now) version of fourth quarter GDP in the U.S. was released . in terms of aggregate GDP no big changes was made. A upward revision in inventories slightly offset by lower personal consumption contributed to raising the headline number from 1.6% to 1.7%. Inflation indexes were also somewhat upwardly revised, particularly the one that the Fed focuses on, the "core" PCE deflator, but the change wasn't particularly dramatic in that respect either. There were however some other noteworthy aspects.

The most bullish news presented was that corporate profits (after adjustment for capital consumption, inventory valuation and taxes) surged 13.8%, after the 4.3% Katrina related dip in the third quarter, leaving them 14.6% higher than a year ago. However, as the profit boom was mainly in the financial sector and in utilities, this may not have as big of an impact on the future trends in business investments as the headline number would suggest. Even so, this factor is bullish for the outlook of business investments. Rising interest rates may however mean that investments will not rise as much as profitability trends would motivate.

As was indicated by the current account report, net factor income from abroad developed in a negative way for America, which means that Gross National Product rose less than Gross Domestic Product.

The composition of growth in this report shows that it is more unlikely than ever that first quarter GDP growth will hit the 5% level some analysts have predicted. As I've pointed out before, it is more likely with roughly 4%. With inventories rising as much as $40 billion in the fourth quarter, it will certainly leave a negative contribution to growth. And the downward revision to real disposable income makes the likely consumption boom of the first quarter less strong than previously expected. Business investment numbers have also been weaker than expected. All of this is only partially cancelled out by some trade numbers for other countries that makes a dip in the February trade deficit likely.


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