Dour Fed and Q4 GDP Miss: Dialing Down Recent Optimism
- Real Gross Domestic Product for 2011Q4 increased at a weaker-than-expected 2.8 percent annual rate.
- New Home Sales for December decreased by 2.2 percent to a 307,000 unit annual rate.
- New Orders for Durable Goods increased by 3.0 percent in December. Good News!
- Initial Claims for Unemployment Insurance increased by 22,000 to 377,000 for the week ending Jan. 21.
The advance estimate of 2011Q4 real GDP growth came in weaker than expected at a 2.8 percent annualized rate; not terrible, but disappointing nonetheless. Coming on the heels of a somewhat dour Federal Reserve policy announcement on Wednesday, today’s GDP report dials down some of the recent optimism over the spate of better-than-expected Q4 data. Consumers again could not push the economy forward, increasing their spending by only 2.0 percent for the fourth quarter. Relatively warm weather over the quarter is being blamed for holding down spending on consumer services, which barely increased at a 0.2 percent annual rate. Consumer spending on durable goods grew at a 14.8 percent annual rate, reflecting gains in auto sales in the quarter. Total fixed investment was soft, increasing at a 3.3 percent annual rate, held down by business investment in structures, which declined at a 7.2 percent annual rate. Investment in equipment and software grew by 5.2 percent, not terrible, but well below the strong 16.2 percent growth rate of the third quarter. Residential investment showed its third consecutive quarterly gain, up at a 10.9 percent annualized rate in the fourth quarter. Inventories were strong, increasing by $58.0 billion ($2005), which added 1.9 percentage points to real GDP growth. Trade was a drag as expected, subtracting 0.11 percentage points from headline growth. The big drag to 2011Q4 GDP came from government spending which declined at a 4.6 percent annual rate, weighed down by a large 12.5 percent decline in federal defense spending. In sum, the good news in the report came from strong inventory growth, supported by a healthy manufacturing sector. The bad news came from tepid consumer spending and business investment, and a big drop in defense spending. The GDP price index increased at just a 0.4 percent annual rate, adding to speculation about deflation. Energy price gains in January combined with increasing rents for housing will keep upward pressure on consumer inflation in early 2012. However, a cooler global macroeconomic environment does, at the least, raise the possibility of weak pricing power later this year.
December sales of new homes dipped by 2.2 percent to a 307,000 unit annual rate. No recovery here. Still-declining used home prices will keep new home sales at the trailing edge of the economy for at least the rest of this year, if not longer. New orders for durable goods increased by 3.0 percent in December on the heels of a strong 4.3 percent gain in November. Commercial aircraft orders scored an 18.9 percent gain, after growing 88.1 percent in November. There will be a correction in the not too distant future. Initial claims for unemployment insurance increased by 21,000 for the week ending January 21, to hit 377,000. Claims have been erratic lately. Shifting to the four-week moving average, we see initial claims down another 2,500.
Market Reaction: Equity markets are down. Treasury yields are down at the long end of the yield curve. Oil is up to $99.96/barrel. The dollar is down against the yen and the euro.