Friday, January 29, 2010

A Few Things About The U.S. GDP Report

The initial U.S. GDP report claimed that GDP rose 1.4% in the fourth quarter (or 5.7% at an annual rate) compared to the previous quarter. It is a strong number, and it establishes clearly that the U.S. economy was growing in the fourth quarter, but it is not quite as strong as it appears at first glance and it certainly does not eliminate the risk of a double dip.

A few relevant points:

-More than a quarter of that growth was illusory, as the domestic purchases deflator rose 2.1% while the GDP deflator rose 0.6%, meaning that terms of trade adjusted GDP rose 4.2%, not 5.7%.

-Many of the assumptions of this preliminary numbers seems over-optimistic (for example on structures and the trade deficit), meaning that the number will probably be revised down, just like the third quarter number was revised down from 3.5% to 2.2% (and could be downwardly revised further in the annual reviews).

-Of the now reported 4.2%, no less than 3.4% depended on reduced inventory reductions. That doesn't make that growth less real, but it does suggest that growth will likely slow down.

-The one really bullish aspect, apart from the overall number, was that government purchases fell back as a share of GDP for the first time since the fourth quarter of 2005. It remains to be seen however, just how sustainable this will be (the Q4 2005 drop was a temporary blip in the upward trend from 2000 to 2009).