Today's GDP Revision: More Production, Less Consumption

Includes: DIA, SPY
by: William Trent, CFA

Based on the best estimate we have so far of the quarter that ended three months ago, U.S. stock futures rally as GDP revised above expectations - MarketWatch:

U.S. stock futures rallied Thursday, as a stronger-than-expected revision to fourth-quarter economic growth and a further drop in jobless claims helped lift sentiment, with the Dow industrials set to end a three-session losing streak.

According to the Bureau of Economic Analysis, which produces the GDP report:

The final estimate of the fourth-quarter increase in real GDP is 0.3 percentage point, or $6.5 billion, higher than the preliminary estimate issued last month. The upward revision to the percent change in real GDP primarily reflected an upward revision to private inventory investment that was partly offset by a downward revision to equipment and software investment.

What that means is that more stuff was produced (this is Gross Domestic Product, after all) but less was consumed. Instead it sat in inventory. Not that this should be a surprise, given the recent data from durable goods, transportation, and other sources. The slowdown in tech spending could reflect anticipation of the Microsoft (NASDAQ:MSFT) Vista release.

An important question is whether inventories, which are low compared to historical averages, should be rising - and how much further they may in fact need to rise. The economic bulls could argue that inventory levels could increase 10% from current levels and still be at about the point they were in 1996. However, they have already been arguing that the declining inventory levels were proof that the new economy had indeed made businesses more efficient. So either way there is a positive and a negative argument surrounding inventory growth.

inventory to sales

Strangely, the most bullish nugget we found relates to the contribution from exports. For all the news about the trade deficit, it is important to remember that a constant deficit in a growing economy can be a contributor to overall change in production. And while we (and others) have typically looked for U.S. businesses to come to the rescue whenever the consumer stopped spending, it is important to remember that there are four components, and either foreign consumers or (last resort) increased government spending could also do the trick.

contributions to GDP

Corporate profits are still growing at a rapid (and ultimately unsustainable) rate, though cash flows have slowed considerably.

corporate profits

All in all, the GDP report seems like little on which to hang a rally hat. But it isn’t that bad, either.

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