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So what to make of the GDP release Friday?

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.8 percent in the fourth quarter of 2011 (that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 1.8 percent.

Sounds like improvement, right?

Well, not quite so fast....

First, this report has a habit of overstating the truth as it's the "advance" estimate. But the real problem is that a huge part of this came from inventory:

The change in real private inventories added 1.94 percentage points to the fourth-quarter change in real GDP after subtracting 1.35 percentage points from the third-quarter change.

This is a problem because it's transient; to get the real GDP change you have to back it out. Last quarter it hurt, but this quarter it helped. So we have a net-net slowdown, which isn't so good. In other words, last quarter it was 1.8% + 1.35 = 3.15% annualized, this quarter was 2.8% - 1.94 = 0.86%.

At this rate we will print negative next quarter on a net-adjusted basis by about 2%.

The issue appears to be in services, which had a precipitous slowdown being up only 0.2%. With the majority of the economy being services....

Federal government spending was down 7%, all national defense -- non-defense spending was up 4.2%. State and local spending decreases accelerated from 1.6% to 2.6% (they're broke folks.)

The trade deficit was up from last quarter, now 582 billion on an annualized basis, with exports increasing only slightly but imports going up more. Thank Chinese labor and environment exploitation for that (again.)

The personal "savings" rate (income minus spend) was down again, and it appears we're back to trying to finance our living rather than decreasing spending.

This is the same pattern we saw in 2008 as the economy started to roll over.

Source: GDP: Is It What It Appears?