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About that GDP . . .

Posted By Barry Ritholtz On January 28, 2006 @ 6:02 pm In Economy | Comments Disabled

I find it amazing that the economic slow down — obvious not just in hind sight, but for the past 6 months (at least) — has finally grabbed the attention of Wall Street.

Not that you could tell from yestersday’s market, but who am I to question the perversity of the crowd? As mentioned previously [1], we are in a "bad news is good news" phase.

Anyway, check out where the economy softened in the very ugly chart below:

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Wsj_econo_20060127 [2]Consumer spending dropped over 70%, and Business investment dropped nearly as much. Home building cut  in half. A huge buildup in inventories versus a prior drop. The trade deficit got much worse. Even Uncle Sam sepnt less.

Occasional Fed conduit Greg Ip notes the details in  the WSJ [3]:  "Economic growth slowed to its most sluggish pace in three years at the end of last year as consumers and businesses applied the brakes to spending. While a rebound is likely in the current quarter, the expansion after two brisk years appears to be moderating as higher energy prices and interest rates begin to bite.

The nation’s gross domestic product, or total output of goods and services, grew at just a 1.1% annual rate in the fourth quarter, the Commerce Department said Friday. That’s the slowest rate since the fourth quarter of 2002 and well below the average 4.1% growth of the prior 10 quarters.

The principal cause was a slowdown in growth of consumer spending to a four-year low of 1.1%. Other sectors softened, too. Business investment grew just 2.8%, less than a third of the prevailing rate in the prior 2½ years. Residential housing construction grew 3.5%, the slowest pace in a year. And the trade deficit widened sharply, damping domestic production. Federal defense spending dropped, too."

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How is it that Federal spending slowed? Aren’t we helicopter dropping cash into New Orleans? (oh, wait — that’s for deflation).

The sunshine crowd pointed to four factors that are likely to reverse in Q1:

1) Emergy imports replacing Gulf of Mexico production

2) Consumer spending growth slowed during the quarter mostly because of weak automobile sales.

3) Federal defense outlays fell because of the late signing of the defense appropriations bill, and Pentagon spending will likely rebound.

4) Business investment was held back by a drop in transportation-equipment purchases.

I guess they are about half right. I certainly do not expect a consumer spending resurgence — that’s just wishful thinking in my book after the mediocre holiday season; And the crew that touted Q3 Capex Spending as the start of a new run of corporate spending, is deathly silent on the Q4 Capex dearth. The Q4 Capex makes that one strong quarter look like an aberration. We’ll see if it resumes anywhere near Q3 strength in Q1.

The dismal scientists expect growth to (mostly) recover in the first quarter: "Indeed, initial claims for unemployment insurance have been trending lower, leading some analysts to predict that job growth will top a hefty 250,000 in January."

Puh-leeze. Need I have to remind you how utterly awful [4] this crowd has been at guess-timating job creation [5]?

Later in the article, the Ipster gets into some harsh specifics:

"Yet the U.S. may be settling into a period of growth that is slower than in the past couple of years — not unusual for an economy four years into an expansion. To absorb last year’s jump in natural gas and gasoline prices, consumers may have to restrain other spending. The Federal Reserve’s steady increases in short-term interest rates may finally be having an effect on borrowing and spending. Auto makers are more reluctant to offer cut-rate financing. And while long-term mortgage rates haven’t risen in the past two years, increasingly popular adjustable-rate mortgages, tied to short-term rates, have.

The GDP report also found that inflation crept up. The price index of consumer expenditures, excluding food and energy, the Fed’s preferred inflation measure, advanced at a 2.2% annual rate, up from 1.4% in the third quarter, putting it around the top of incoming Fed chairman Ben Bernanke’s comfort zone of 1% to 2%.

The Fed is expected to raise its target for short-term interest rate to 4.5% on Tuesday from 4.25%. Markets and economists are divided on whether it will raise the rate again on March 28 to 4.75%.

Consumers did spend more than they earned in the fourth quarter, producing a negative saving rate for the third consecutive quarter and a negative rate for the year as a whole for the first time since 1947, when records of such data began. But the rate improved in the fourth quarter to minus 0.4%, from minus 1.8% in the third quarter."

Why the rally, if things look that sour? The assumption is that this bad news is good, because the Fed will end its tightening cycle. Then all we have to worry about is everything else, and a slowing economy. (Whoopee!)

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Source:
Economic Growth Slowed to 1.1% In Fourth Quarter [3]
GDP Is Likely to Rebound, But Many Say Expansion Will Moderate This Year
By GREG IP
THE WALL STREET JOURNAL, January 28, 2006; Page A1
http://online.wsj.com/article/SB113836607293558161.html


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URL to article: http://www.ritholtz.com/blog/2006/01/about-that-gdp/

URLs in this post:

[1] mentioned previously: http://bigpicture.typepad.com/comments/2006/01/nfp_1st_one_of_.html

[2] Image: http://bigpicture.typepad.com/photos/uncategorized/wsj_econo_20060127.gif

[3] WSJ: http://online.wsj.com/article/SB113836607293558161.html

[4] utterly awful: http://bigpicture.typepad.com/comments/2005/03/the_mystery_of_.html

[5] guess-timating job creation: http://www.google.com/search?hl=en&lr=&c2coff=1&q=site%3Abigpicture.typepad.com+%22the+under%22&btnG=Search

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