Final Q4 GDP: Goldilocks has left the building

Markets rallied yesterday morning on the Final GDP data, revised to 2.5% – up from 2.2% Preliminary report (2/28) but down from the  initial Advance (1/31) read of 3.5%. But the indices gave up those gains and then some as the day wore on. A little "window dressing" into quarter’s end closed the markets in the green by day’s end.

Was the GDP "improvement" really all that good? A quick look at the details suggests otherwise.

The 0.3% improvement was two parts inventory build (primarily autos), one part GDP deflator "adjustment." Pretax corporate profits decreased
0.3% in the fourth quarter of 2006, the first quarterly decline since
the third quarter 2005.

CapEx spending remains punk, as corporate management is cutting back on all manners of spending to avoid eating into profits — short term thinking at its finest. Nonresidential investment fell 3.1% for Q4, worse than the initially reported decline of 2.4%. But the big miss was Equipment and software spending — down 4.8% (vs initial -3.2%). This is consistent with the series of weak durable-goods reports we hav sen the past few months.

Signs of economic strength? Hardly.


"The (GDP) headline number looks better, but the gut of the report is a
little worse," said Robert Brusca, chief economist for Fact and Opinion
Economics in New York. "Going forward, we still don’t know, but you
should be disturbed by the lack of capital spending."

investment spending fell at a 3.1 per cent annual rate in the fourth
quarter rather than the 2.4 per cent decline the government estimated a
month ago. That contrasted with a 10 per cent third-quarter jump.

Spending on new-home building plummeted by 19.8 per cent – even steeper
than the 19.1 per cent fall estimated a month ago – after an 18.7 per
cent drop in the third quarter.

It was the fifth quarter in a
row that residential spending has fallen and the steepest since a 21.7
per cent plunge in the first quarter of 1991 when the economy was on
the brink of recession."

The overall trend of GDP, corporate profits, durable goods and CapEX spending is downward. Housing, Autos, and Manufacturing are already in a recession (I have a car coming off lease May 1st, and I plan on waiting some time to see what sort of incentives the auto industry will be throwing my way as inventory continues to build). I don’t see how these issues get any better any time soon.

Goldilocks has left the building . . .


U.S. GDP growth hobbled by stocks of unsold goods
Rising inventories, give year-end lift but spending curb suggests slowdown
Glenn Somerville
Reuters Mar 30, 2007 04:30 AM

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