Is GDP As Bad As It Looks Or Is It Worse?

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by: Robert Brusca

GDP really, really disappointed …

No, it's not that I had higher number ... but I did

No, it's not that so much growth came in inventories ... although that is true.

It's that consumer services spending grew, inched, crawled, and barely moved higher, rising by 0.2% (at an annualized rate!) in Q4!!!

Huh? That's Q4? The quarter when job growth picked up so much especially in services?

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The service sector is the job creation sector for the U.S. economy and job growth has picked up there. If it is going to continue we need much more growth in spending on services. The Q3 GDP report gave us a hint of strong services spending in its early estimates, then progressively revised that bulge lower until it became tepid. Now in Q4 the early estimate of GDP finds spending on consumer services is weak indeed. For all of the economy services spending fell at a 0.9% rate in Q4. Very weak, anemic, services spending is the most disappointing thing in this report along with its withering trend.

Exports are holding up. Imports revived but have been undershooting what GDP growth would call for since they surged in Q1. Yr/Yr imports are still a touch weaker than U.S. GDP growth would imply.

We have had an inventory surge but Inventory-to-Sales ratios in industry are OK so we do not have an overhang problem. But we do need spending to continue if the stockpiles of goods are going to continue to be built and if an excess of inventory is to be avoided. Yet real PCE was nothing great this quarter. The services piece of consumer spending (and its components) inspires no optimism.

Government reverted to its biggest drop since Q1, further sucking the lifeblood out of whatever domestic spending momentum the private sector could mount. I guess vampire movies are still in vogue...for good reason.

Real final sales made the speed of a Seattle slug look fast ... they rose at just a 0.8^ annualized rate.

Maybe the Fed's apparent pessimism on the economy as exhibited in its outlook released this week is justified?

GDP was not a great report; not a good report. It was not such a bad headline, but the guts were not what I wanted to see. The business sector is weaker, the consumer is barely 'OK' with weak services spending that is far too-weak; government is in a severe back-track plus lots of growth was due to inventory building. In a word: 'Yech!'

GDP may yet prove to be sustainable. The growth rate might improve. Several indicators of job growth are still in great shape. Those reports do not seem consistent with this one. Which one is right? For now we are left in a quandary about the outlook with no good way to pick and choose among disparate reports. For my part I tend to set the GDP report aside, instead of embracing it. GDP accounting and record keeping has its oddities. GDP is quarterly. We still have an incoming flow of data that is quite up to date as of January (the GDP report still has one, or two months in some cases, of estimated data in it). These more topical monthly reports are still showing strength and solidity especially in the ongoing job market measures and in consumer sentiment. If weak GDP were holding back the job market we would know about it by now. For now I think the right thing to do is to wonder what the GDP report is missing or how it will be revised up.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.