4Q GDP: Is That Daylight, Or A Headlight?


When in a tunnel, that’s a key question and you better not get it wrong.

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 3.2 percent in the fourth quarter of 2010, (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 2.6 percent.

That would normally be an extremely bad estimate.  Why?  Because the BEA almost always “overestimates” (or is that just making it up?) on their advance numbers, and then revises down.  It also was a miss against expectations.  So let’s take a look inside.

The acceleration in real GDP in the fourth quarter primarily reflected a sharp downturn in imports, an acceleration in PCE [personal consumption expenditures], and an upturn in residential fixed investment that were partly offset by downturns in private inventory investment and in federal government spending and a deceleration in nonresidential fixed investment.

A sharp downturn in imports?  Hmmm…. how do you get an acceleration in PCE [personal consumption expenditures] if imports are decreasing and we’re not transferring manufacturing jobs back here?

I’ll tell you where, and you’re not going to like it – commodity price increases have blown up PCE on necessities, particularly food and energy.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 2.1 percent in the fourth quarter, compared with an increase of 0.7 percent in the third.

That’s it right there.  Subtract out the PCE from GDP and it’s 1.1% annualized, which is almost-exactly the growth in population on an organic basis.

That is, it’s an actual zero.

Real federal government consumption expenditures and gross investment decreased 0.2 percent in the fourth quarter, in contrast to an increase of 8.8 percent in the third.  National defense decreased 2.0 percent, in contrast to an increase of 8.5 percent.  Nondefense increased 3.7 percent, compared with an increase of 9.5 percent.  Real state and local government consumption expenditures and gross investment decreased 0.9 percent, in contrast to an increase of 0.7 percent.

Government’s out of money, especially state and local governments.  On the federal side the entire decrease was defense; without that the federal government spent 3.7% more.

Real gross domestic purchases — purchases by U.S. residents of goods and services wherever produced — decreased 0.3 percent in the fourth quarter, in contrast to an increase of 4.2 percent in the third.

That ain’t good.  I thought PCE was up?  Hmmmm….

The internals don’t have anything striking in them; the worst subindex was vehicle sales, which is interesting, given that Ford missed this morning on earnings (and is getting hit a fair bit.)

On balance I’d call the report subdued, and certainly not enough to bring improvement in employment.  Having the end-point in real terms be basically flat per-capita doesn’t excite.

Back to the earnings, I suspect… the market, after reacting a bit on the release, is up a couple points from where it was before the data, appearing to confirm my read.  The real story, I suspect, in terms of market movement will be in the employment report next Friday, and from the mixed signals coming from the claims data I don’t expect a particularly strong positive report there at all, nor do I see support in this data series suggesting that the participation rate has improved to any meaningful degree.

The Market-Ticker