A Few Thoughts About Q4 US GDP

US Q4 GDP disappointed in the headline at 2.8% instead of 3%, but the real disappointment is in the details.  The key there is inventories, where the preliminary figures showed rose $56 bln at an annual pace, adding 1.9 percentage points to GDP.    This build up may weigh on Q1 12 GDP as inventories are unwound.   Equipment and software spending rose 5.2% vs 16.2% in Q3.  This slowdown is likely to continue as the end of the tax break is felt. 

Another disappointing detail was in inflation and that plunged.  The GDP deflator rose 0.4% after a 2.6% rise in Q3.  The core PCE deflator rose 1.1% down from 23.1% in Q3.  This is important, especially in light of the Fed's statement.  This is not deflation, of course, but if it persists, the risk of QE3 increases. 

Rresidential investment jumped 10.9% after a 1.3% gain in Q3.  This is not home building, but home improvement.    How did households pay for this? Draw down savings.  Savings fell to 3.7% from 3.9% and is the lowest since Q4 07. 

The government sector remains a drag on GDP.  This may be surprising for some who amid the election cycle have been bombarded with reports of the expansionary nature of the government.  What is happening is that the federal government expenditures are not offsetting the retrenchment by local and statement government.  Overall, the government cut spending at a 4.6% annual rate, the fifth consecutive quarterly decline.  For the entire year, government spending dropped 2.1%, the most since 1971. 

There is some chance that Q4 GDP is revised higher as the rest of the data becomes available.  There are three sources that it may come from, The first two, trade and inventories, is always the case, but in addition, be sensitive to consumer services.  In Q4 demand for consumer services rose slight 0.2%, the weakest in almost two years. 

The general shape of the GDP in 2012 can be loosely sketched as weaker Q1 on the back of inventory.  Q2 stabilizes.  Q3 maybe some improvement as state governments start new budgets and are not expected to retrench as much as last year.  Q4 gradual recovery continues.