GDP Highlights

There has been little reaction to the final revisions of Q4 09 US GDP, though the North American market seems somewhat more dollar friendly than Europe was. The take away from Q4 GDP is a small downward revision in growth to 5.6% from 5.9% and a small upward revision to inflation. The core PCE measure rose 1.8% compared with 1.6% of the prior estimate.

Despite better inventory management and adoption of "just-in-time-inventories", the inventory cycle is still a key driver of business cycle--on the way down and the way up. Inventories are still be liquidated albeit at a slower rate.

Last month the Commerce Dept estimated that inventories were drawn down by almost $17 bln but today says the draw down was closer to $20 bln. Q3 inventories were liquidated to the tune of almost $140 bln. Because of pricing it is difficult to estimate inventory developments here in Q1, but while some positive contribution to GDP is likely, it is unlikely to be as big as it was in Q4. A $120 bln swing is not repeatable.

Business investment in equipment and software was revised up to show a 19% increase rather than 18.2%. This contributed about 1.1 percentage points to GDP), while real consumption was shaved to a 1.6% increase from 1.7%. The BEA attributed this to financial services and fees.

In the final GDP revision, the government also includes an estimate of corporate profits. This is new information not contained in previous GDP estimates. Corporate profits rose $108.7 bln in Q4 to $1.47 trillion, the largest rise since 1984.

Q1 10 growth seems likely to be near 3% and Q2 around the same if not a little stronger. The real debate is over H2, when fiscal policy turns to a headwind and rising interest rates may begin taking a toll and some of the favorable base effects begin fading.